US Dollar weakens after Trump administration tries to fend off inflation shock

  • The US dollar retreats after sources revealed that the Trump administration is considering a gradual implementation of tariffs.
  • In early trading on Tuesday, an initial reaction briefly pushed concerns about inflation and Fed policy to the back burner.
  • US Dollar Index (DXY) falls below 110.00 and looks for support to rebound.

The US Dollar Index (DXY), which tracks the value of the Dollar against six major currencies, dips below 110.00 on Tuesday, extending the previous day’s pullback from a more than two-year high of 110.18. The main driver comes from sources in President-elect Donald Trump’s incoming administration who revealed that they are considering a very slow month-to-month implementation of the tariffs to avoid an inflationary shock, Bloomberg reported. A second driver comes from headlines about a US-brokered ceasefire agreement between Hamas and Israel, which is supported by both current US President Joe Biden and President-elect Donald Trump.

The US economic calendar becomes important on Tuesday, with the publication of the Producer Price Index (PPI) as an appetizer for the more important Consumer Price Index (CPI) on Wednesday. General expectations are that monthly indicators should soften or remain relatively stable, while year-on-year benchmarks will rise compared to previous readings.

Daily Market Summary: Starting to Thicken

  • At 13:30 GMT, the Production Price Index (PPI) for December is published:
    • The monthly core PPI indicator is expected to increase by 0.3% compared to 0.2% in November.
    • The monthly headline PPI is expected to increase by 0.3%, from 0.4% in the previous month.
    • The annual headline PPI is expected to rise 3.4% from 3.0% in November, while the annual core PPI is expected to rise 3.8% from 3.4% in the previous month.
  • At 15:00 GMT, Federal Reserve Bank of Kansas City President Jeff Schmid delivers a speech on the US economic and monetary policy outlook at an event hosted by The Central Exchange.
  • At 20:05 GMT, Federal Reserve Bank of New York President John Williams delivers opening remarks at the New York Fed’s “An Economy That Works for All: Housing Affordability” event at New York.
  • Chinese stocks are rising on rumors of a gradual implementation of tariffs. European stocks and US futures are picking up the positive sentiment, with all major indices in the green on the day.
  • The CME FedWatch tool projects a 97.3% probability that interest rates will remain unchanged at current levels at the January meeting. The Federal Reserve (Fed) is expected to continue to rely on data with uncertainties that could influence the path of inflation once President-elect Donald Trump takes office on January 20.
  • US yields are declining substantially. The benchmark 10-year bond is trading around 4.753% at the time of writing on Tuesday, fading from its new 14-month high of 4.802% seen on Monday.

US Dollar Index Technical Analysis: This Will Be the New Normal

The US Dollar Index (DXY) is set to see increased volatility. President-elect Donald Trump’s constant delivery of statements, followed by comments from sources within his team, will provoke several sudden moments and reactions. This means that the sense of direction could become distorted and hazy from now on.

To the upside, the psychological level of 110.00 remains the key resistance to overcome. Further up, the next big upside level to reach before advancing further remains 110.79. Once beyond there, it is quite difficult to reach 113.91, the October 2022 double top.

Looking down, the DXY will look for a bounce off the green ascending trend line from December 2023, which currently sits around 109.00 as nearby support. In case of further declines, the next support is 107.35. The next level that could stop any selling pressure is 106.52, with the 55-day SMA at 106.92 strengthening ahead of this support region.

US Dollar Index: Daily Chart

US Dollar Index: Daily Chart

US Dollar FAQs


The United States Dollar (USD) is the official currency of the United States of America, and the “de facto” currency of a significant number of other countries where it is in circulation alongside local banknotes. According to 2022 data, it is the most traded currency in the world, with more than 88% of all global currency exchange operations, equivalent to an average of $6.6 trillion in daily transactions. After World War II, the USD took over from the pound sterling as the world’s reserve currency.


The single most important factor influencing the value of the US Dollar is monetary policy, which is determined by the Federal Reserve (Fed). The Fed has two mandates: achieve price stability (control inflation) and promote full employment. Your main tool to achieve these two objectives is to adjust interest rates. When prices rise too quickly and inflation exceeds the 2% target set by the Fed, the Fed raises rates, which favors the price of the dollar. When Inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which weighs on the Dollar.


In extreme situations, the Federal Reserve can also print more dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit into a clogged financial system. This is an unconventional policy measure used when credit has dried up because banks do not lend to each other (for fear of counterparty default). It is a last resort when a simple lowering of interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, primarily from financial institutions. QE usually leads to a weakening of the US Dollar.


Quantitative tightening (QT) is the reverse process by which the Federal Reserve stops purchasing bonds from financial institutions and does not reinvest the principal of maturing portfolio securities in new purchases. It is usually positive for the US dollar.

Source: Fx Street

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