- The US dollar is weakening due to economic slowdown signs, political uncertainty, and Trump’s trade policies.
- Markets are watching the Fed’s interest rate decision, while Germany’s stimulus plan strengthens the euro.
- If the dollar index stays below 104, the downward trend may continue, with 103 as key support.
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The US Dollar Index is weakening because of signs that the economy is slowing down and ongoing political uncertainty. Right now, it is trading at 103.7, close to its lowest level in five months. A big reason for this decline is President Donald Trump’s trade policies and higher tariffs, which are causing instability in the markets.
On Friday, the Michigan Consumer Confidence Index dropped to its lowest level in two years. This shows that people are feeling less confident about the economy, likely because of Trump’s renewed trade wars, which are slowing growth. At the same time, inflation expectations have risen. With weak consumer confidence and rising inflation, the US economy could be heading into a fragile period.
Trump’s Trade Policies Hurt Dollar
Trump’s trade policies continue to weigh on the dollar. Market volatility increased after he announced a 200% tariff on wine, cognac, and other alcoholic beverages from Europe. This kind of uncertainty pushes investors toward safe-haven assets. However, due to economic concerns and political uncertainty in the US, the dollar is not a top choice for safety.
After Trump’s victory, the view that a strong dollar policy would be followed came to the fore. Accordingly, market participants turned to the dollar, citing the economic problems in the Eurozone, EUR/USD was expected to decline to 1.
However, as the Trump administration’s tariff policy and the reactions of other countries fueled trade wars, dollar outflows accelerated. Under current conditions, it seems difficult for the dollar to strengthen. Some commentators, on the other hand, think that possible rises can be considered as a selling opportunity.
Fed’s Rate Decision Matters
Markets are focused on the US Federal Reserve’s interest rate decision on Wednesday. The Fed is expected to keep rates steady at 4.25%-4.50%, but investors will closely watch the post-meeting statements for clues about future policy. Powell’s earlier comments about taking a cautious approach suggest this meeting may follow a "wait-and-see" strategy.
The Fed’s economic projections on growth, inflation, and unemployment will be key. Markets are especially focused on plans to reach the 2% inflation target. Current expectations are that the Fed will hold rates steady and take a cautious stance due to economic uncertainties.
Germany’s Fiscal Package Supports Euro
External factors are adding to the pressure on the dollar. Germany’s new spending plan, designed to boost its economy and defense budget, is strengthening the euro. At the same time, signs of a slowing US economy are weighing on the dollar, making the euro’s gains even more pronounced.
Markets are now focused on US retail sales data, which could provide further clues about economic growth. If consumer spending weakens, it may reinforce concerns about a slowdown and influence the Fed’s interest rate decisions. As a result, both Germany’s stimulus plan and the Fed’s next moves will play a key role in shaping the dollar’s direction in the coming weeks.
Technical Outlook on DXY
The dollar index remains under downward pressure. As long as DXY stays below 104, this trend is likely to continue. The 103.2 level, where buying activity was seen last week, serves as an intermediate support.
If the index falls below 103, it could drop further toward 102.36, aligning with Fib 0.786. The short-term EMA values indicate a bearish trend, and as long as the price stays below these averages, the negative outlook remains. Additionally, the Stochastic RSI on the daily chart suggests that DXY is still in oversold territory.
On the upside, 104 is the first key resistance. A daily close above this level could lead to a recovery toward 105.2. This upward move may be supported by hawkish Fed statements or negative sentiment on interest rate cuts. However, the general expectation is that the Fed will maintain a cautious stance. If the Fed continues its wait-and-see approach, the dollar may remain under pressure.
The dollar continues to decline as signs of a weakening US economy and Trump’s trade policies weigh on investor sentiment. This week, markets will focus on the Fed’s interest rate decision, while Germany’s fiscal expansion in the Eurozone could also influence the dollar’s direction. Without a shift in US policies, a strong recovery for the dollar appears unlikely.
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