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US Dollar Softening as Markets Digest Latest Tariff Developments

Traders are reacting to recent pronouncements regarding tariffs, overshadowing an improved investor sentiment in equities. The Federal Reserve’s data-dependent approach remains in place, with the market anticipating a possible rate cut in June.

Bond yields are hovering near 4.60%, a significant decline from last week’s highs, reflecting shifting risk appetite. The US economy continues to outperform, yet abrupt policy changes could hinder the Dollar’s near-term recovery efforts.

The US Dollar Index (DXY) is trading slightly above 108.00 and could experience further losses if selling pressure intensifies. Trading on Tuesday was subdued as markets digested comments made on Monday about tariffs on North American neighbors.

Key Market Movements: The USD weakened despite proposed tariffs on Canada and Mexico. Equities exhibited modest gains on Tuesday, with European stocks largely unchanged and US futures up by approximately 0.50%. US yields are near 4.60%, well below last week’s levels, but sudden trade policy announcements have triggered reversals in currency pairs and risk assets.
Tariff Impact: The proposed 25% levy on imports from Canada and Mexico by early February immediately pressured the Canadian Dollar (CAD) and Mexican Peso (MXN).

Strong Dollar Narrative: Many analysts view these trade moves as temporary disruptions, believing the ongoing rally is primarily driven by the US economic dominance and steady Fed policy.
Fed Outlook: The Federal Reserve’s media blackout precedes Chair Powell’s press conference on January 29th. The market currently prices July as the earliest date for a potential rate cut, contingent on forthcoming data. The CME FedWatch Tool indicates a near 55% probability of unchanged rates in May, suggesting a possible June rate cut if inflation moderates.

DXY Technicals: The US Dollar Index has broken below its 20-day Simple Moving Average near 108.50, and buyer attempts to reclaim that level have been unsuccessful. With DXY hovering around 108.00, a fresh rejection at the 20-day SMA suggests increasing downside risk. If sellers maintain control, the Greenback could experience a deeper pullback despite broader fundamentals pointing to US economic resilience. However, any signs of supportive trade developments or a shift in Fed expectations could quickly reignite Dollar demand.

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