The US Dollar Index (DXY) has fallen below the 98.50 threshold during early Thursday trading in Asia, signaling sustained bearish momentum for the US Dollar (USD). Weighed down by softer-than-expected inflation data and an increasing probability of a Federal Reserve (Fed) interest rate cut in September, the Greenback is trading at approximately 98.40, extending losses for the second consecutive day.
As global markets digest new economic and geopolitical developments, the outlook for the USD remains clouded by both domestic monetary policy shifts and international trade dynamics. Dive into this informative breakdown by the professionals at Aurudium.
Inflation Miss Sparks Rate Cut Speculation
At the core of the Dollar’s weakness is the US Consumer Price Index (CPI) data for May, which came in below expectations. The headline CPI rose 2.4% year-over-year (YoY), underperforming the market’s forecast of 2.5%, albeit slightly higher than the 2.3% registered in April.
Meanwhile, the core CPI, which strips out the more volatile food and energy prices, printed at 2.8% YoY, lower than the 2.9% consensus.
This disinflationary pressure reinforces the market’s conviction that the Federal Reserve could begin easing monetary policy as soon as its September meeting. Fed Funds Futures now price in a higher probability of at least one 25-basis-point rate cut, with additional easing potentially following later in the year should inflation continue to moderate. The real yield on US Treasuries is also pulling back, further eroding the USD’s attractiveness.
Geopolitics: Trade Deal Headlines and Middle East Tensions
While monetary policy is dominating headlines, geopolitical developments are also influencing the US Dollar’s valuation.
In a post on Truth Social on Wednesday, the US President stated that a US-China trade deal is “done,” though it awaits final approval from both himself and Chinese President Xi Jinping. He added that the US is securing 55% tariffs, while China will bear just 10%, highlighting the asymmetric nature of the agreement.
The market, however, remains skeptical, given the long history of trade negotiation volatility. Importantly, the US President noted that he may extend the trade deadline, but doesn’t foresee it being necessary. He also hinted at imposing unilateral tariff rates within two weeks, a move that could introduce further market uncertainty and weigh on the USD’s stability.
On a more technical trade front, China’s export policy on rare-earth minerals could present new challenges. According to the Wall Street Journal, China will allow limited six-month licenses for rare-earth exports to US automakers and manufacturers, aiming to retain strategic leverage. These measures indicate that while progress is being made, supply chain vulnerabilities remain a key pressure point in US-China relations.
Technical Outlook and DXY Performance
Technically, the DXY faces increasing downside pressure as it breaks key support levels. A sustained move below 98.50 could trigger a deeper retracement toward the 98.00 mark, especially if US economic data continues to underwhelm.
Momentum indicators such as the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are tilting bearish on daily charts, confirming the weakening momentum.
Conversely, any hawkish commentary from Fed officials or unexpected geopolitical escalations could provide a short-term lift. Traders are closely watching initial jobless claims, retail sales, and Fed speakers for further direction.
As it stands, the broadening divergence between Fed policy and that of other central banks, particularly the European Central Bank (ECB) and Bank of Japan (BoJ), adds complexity to the dollar’s trajectory.
Broader Currency Market Impact
The dollar’s weakness has lent strength to its counterparts. The Euro (EUR/USD) has climbed above 1.0900, while the Japanese Yen (USD/JPY) has dropped below 154.50 amid safe-haven flows and narrowing yield differentials.
Commodity-linked currencies like the Australian Dollar (AUD) and Canadian Dollar (CAD) have also firmed, supported by improving risk sentiment and firmer commodity prices.
Conclusion
The drop of the US Dollar Index below 98.50 reflects a confluence of macro and geopolitical forces. With US inflation easing, the odds of a Federal Reserve rate cut in September are climbing, weakening the Greenback.
Meanwhile, ambiguous signals from US-China trade negotiations and escalating Middle East tensions contribute to a volatile backdrop. As traders weigh disinflation against geopolitical risk, the path forward for the USD will hinge on incoming data, Fed commentary, and global developments.
