US Dollar Declines as US PMI Reveals Stalled Outperformance

The US Dollar has fallen back to session lows and is on track for a more than 2% loss this week in the Dollar Index. President Trump delivered softer comments, suggesting that tariffs on China might not be imposed after all. As a result, the US Dollar Index (DXY) has dropped below 107.50 and is testing further downside. This intraday loss followed President Trump’s surprising comments the previous day, casting doubts on the application of tariffs on China after a phone call with China’s President Xi Jinping. Meanwhile, the Bank of Japan (BoJ) hiked interest rates by 25 basis points, leading to substantial losses for the US Dollar against the Japanese Yen (JPY).

Economic data showed strong numbers in Germany’s Purchasing Managers Index (PMI) preliminary readings for January, which fueled more Euro (EUR) strength against the US Dollar. Later on Friday, the US received its S&P Global PMI preliminary readings for the same month. The Services component missed its estimate and came in softer than the previous month.

Trump commented on tariffs on his phone call with Chinese President Xi Jinping, surprising markets by stating he does not want to impose tariffs on China. He also commented on the Federal Reserve and US interest rates, affirming that he would demand an immediate rate cut. Germany’s preliminary Services PMI jumped to 52.5 in January, beating the 51.0 estimate and the previous 51.2. The Composite PMI moved out of contraction, reaching 50.1 and surpassing the expected 48.2 and the previous 48.0.

The CME FedWatch tool projects a 52.2% chance that interest rates will remain unchanged at current levels in the May meeting, suggesting a rate cut in June. The US 10-year yield is trading around 4.625%, recovering from its poor performance earlier this week at 4.528% but still far from the more-than-one-year high of 4.807% seen last week.

Technically, the US Dollar Index (DXY) is facing downward pressure alongside US yields. Tail risks are forming, with markets starting to downplay the actual stance, which might still see the US Dollar rally if Trump imposes tariffs on China.