The US dollar held near a five-month low against major currencies as investors awaited economic forecasts from the US Federal Reserve. Concerns are growing about the impact of global trade tensions on economic growth.
Economic Forecasts and the Impact of Trade Tensions
The euro held steady below its previous high of $1.0947, its highest level since October 11. Meanwhile, the yen saw some reversal of recent gains, having rallied on safe-haven demand.
Fears that US President Donald Trump’s tariff policy could slow the global economy have put pressure on the dollar. Recent polls have shown a marked decline in economic confidence.
Fed and Interest Rate Expectations
The Federal Reserve is expected to remain among the few central banks to keep interest rates unchanged this week. The Bank of Japan and the Bank of England are also expected to maintain their current monetary policy. Investors are expecting the Fed to provide further signals on the impact of Trump’s policies on the US economy. The Federal Reserve will release new economic forecasts this week, providing investors with clues about the central bank’s outlook. Bart Wakabayashi, Tokyo branch manager at State Street, noted that the economic outlook has improved, but overall sentiment has weakened due to the uncertain economic outlook.
Economic Hedging in Markets
Markets are beginning to hedge their bets, as investors anticipate the Federal Reserve will cut interest rates by the end of the year. A 60 basis point cut is expected, equivalent to two full cuts.
On the other hand, Citi FX strategists believe the Fed will adopt an accommodative policy if economic growth deteriorates. If growth continues to slow and inflation rises, the Fed is likely to adopt more conservative policies.
US Dollar Performance
Despite economic pressures, the US dollar index rose 0.13% to 103.59, moving away from its five-month low of 103.21. Meanwhile, the euro fell slightly to $1.0907, following its recent rise.
Economic Tensions in Europe and Asia
In Germany, the Constitutional Court rejected appeals filed by opposition parties against the government’s plan to introduce large economic stimulus. This decision allows the government to move forward with discussing stimulus plans. Meanwhile, Japan’s yen weakened after reaching its highest level since last October, amid concerns about the impact of the trade war.
Monetary Policy in Japan
Bank of Japan policymakers are expected to discuss the challenges posed by the trade war to the Japanese economy. With markets anticipating possible interest rate hikes this year, the yen could decline in value if the bank adopts additional easing policies.
Economic Risks from Tariffs
Concerns about the tariffs imposed by the United States on various goods continue to worry businesses. Tariff wars could lead to unprecedented cost increases, forcing companies to reevaluate their supply chain strategies.
Susan Vincent, transfer pricing partner at Blake Rothenberg, said that geopolitical tensions are significantly raising costs, which is reflected in pricing and sourcing strategies.
Impact of Tariffs on the UK
In the context of trade wars, Liam Byrne, Chairman of the UK Parliamentary Business Committee, is calling for urgent negotiations with the United States to obtain exemptions from US tariffs. The 25% tariff on steel is threatening the British manufacturing sector.
US Dollar Index Forecast
The US Dollar Index rose to 103.60 during the early European session on Tuesday, up 0.14% on the day. However, the outlook remains bearish as concerns about economic policy persist.
Markets are likely to monitor any changes in interest rate policy by the Federal Reserve. There are strong expectations for a rate cut soon.
Technical Indicators for the US Dollar
Despite the slight rise, the overall trend of the US Dollar Index remains bearish. The Relative Strength Index (RSI) is hovering near low levels, supporting the downside. The initial support level is located at 103.35, while the resistance level is 104.10. If the downtrend continues, the index could reach 102.20.
Markets remain under significant pressure due to the trade war and global economic tensions. With the dollar stable, the negative outlook persists. Changes in interest rates and tariff wars will continue to shape the economic landscape going forward.
How do Fed decisions affect the US Dollar?
The most important factor influencing the value of the US Dollar is monetary policy, set by the Federal Reserve (Fed). The Fed has two primary mandates: achieving price stability (controlling inflation) and promoting full employment. Its primary means of achieving these goals is adjusting interest rates. When prices rise rapidly and inflation exceeds the Fed’s 2% target, the Fed raises interest rates, supporting the value of the US Dollar. When inflation falls below 2% or the unemployment rate rises significantly.
What is quantitative easing and how does it affect the US dollar?
In extreme cases, the Federal Reserve may also print more dollars and implement a policy of quantitative easing (QE). QE is the process by which the Federal Reserve significantly increases the flow of credit into a struggling financial system. It is an unconventional policy measure used when credit dries up due to banks’ reluctance to lend to each other (for fear of counterparty default). Also It is a last resort when lowering interest rates is not expected to achieve the desired effect. It was the Federal Reserve’s preferred weapon in combating the credit crunch that occurred during the Great Financial Crisis of 2008. QE involves printing more dollars.
