Dollar Under Pressure Amid Trade Tensions

After falling for three months, the dollar index has trended higher over the past week, but it remains unclear whether this leads to a rebound or the downtrend continues.

Where's the Bad News?

Although the dollar has been slowly regaining ground since hitting a low on 21 April, the index is still down over 10% from this year's peak. The buck started to fall before President Donald Trump was inaugurated, long before the tariff announcements, which raises concerns about a downward trend, particularly given reports that . Naturally, the recent recovery coincides with and potential tariff reductions.

While the Administration views a weaker dollar as positive, traders are likely to focus on the market impact. Many US corporations, particularly larger, internationally focused ones like those in the Dow Jones, . S&P 500 constituents generate around 40% of their revenues from abroad, and a weaker dollar could materially increase their revenue and profitability. Exporters could gain a competitive advantage in pricing, and companies reporting foreign activity in dollars could see a boost. However, a weak dollar could undermine its perception as a safe haven and reduce capital flows, potentially impacting profits in major banks, assuming the US avoids a recession.

Rebound or Down for the Count?

Economists are not dismissing the figure and suggest that signs of problems are already emerging. However, an actual recession, if it occurs, is unlikely to be seen until the second half of the year. Supply chain experts warn that there could be further complications even if Trump reverses the tariff situation. Freight from China to the US dropped by around 60% in April, and a return to normalcy could lead to supply chain issues as importers reinstate orders.

This is seen as the best-case scenario. While progress has been made in talks with other countries, . China has rebuffed US efforts to initiate trade talks and is taking a wait-and-see approach as the 90-day clock for global deals counts down. Besides trade, the dollar moves in response to changes in interest rates on US debt, which have fluctuated as and Congress struggles to pass a funding bill to avert a default if the government once again hits the debt ceiling. This could further erode confidence in the dollar as a safe haven, potentially keeping it on the back foot as global markets face another two months of trade uncertainty.

Dow Jones Bulls Regain Control?

After completing a double top pattern in February, the Dow Jones has slid to channel support around 37500, potentially completing the bearish correction. If bulls can recapture 41800, they could open the door to 42900, the upper channel trendline near 44000, and eventually attempt new peaks above 45000. However, if the dollar continues its ascent and prices fall under the 40000 handle again, this will expose 37800 and 37500, risk sliding under the channel and 36500 low, and ultimately raise the risk of a bear market to 35700, 35000, and even lower to 32300.

Source: SpreadEx / Wall Street

Key Takeaways

The greenback may have recovered recently due to reports on tariffs, but markets remain concerned given the US Administration's preference for a weaker dollar. The impact of tariffs on corporations, both positive and negative, remains a key focus. Many companies potentially benefit from a weaker dollar due to their international exposure, with a resolution of trade negotiations and the broader economic outlook likely shaping the dollar's trajectory in the coming months, and in turn, driving US equity indices.