- The DXY Index has fallen back to its daily 21-EMA, which proved to be supportive of price back in early-June.
- Proliferation of trade tensions with China and the EU continues to be the main focal point for market participants.
- Sentiment for the US Dollar remains mixed despite the pullback in recent day.
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The US Dollar (via the DXY Index) is posting a gain for the first time in four days as ongoing trade tensions with the United States' allies and rivals alike continue to simmer. Both China and the EU have staked out aggressive positions against the US under WTO rules, with the threat of a legitimate trade war seemingly increasing every day.
In general, an escalation of trade tensions leading to an outright trade war should be a negative development for the US Dollar. While we don't have much proper historical data to reference - there haven't been that many significant trade issues impacting markets since 2001 (when China joined the WTO and the EU was in existence) - the isolated instances we have suggest that a US-driven trade war would be a net-negative for the US Dollar.
As such, it's worth noting that the US Dollar has been trading like a risk currency in recent days, rallying when US Treaury yields and US stocks go up, and falling when yields and stocks go down. That the US Dollar is gaining today speaks to the fact that yesterday's slide by US equity markets hasn't found follow through in futures market trading overnight.
DXY Index Price Chart: Daily Timeframe ( to June 2018) (Chart 1)
The pause in the US Dollar's drop over the past few days comes at an interesting time for the DXY Index, with price falling to the daily 21-EMA for the first time since the June 14 ECB rate decision. Throughout early-June, the daily 21-EMA was been a magnet for support in the DXY Index, with no two consecutive daily closes coming below the moving average since April 17 and 18.
The driving force behind the DXY Index climbing back to its highest level since July 2017 was the clear policy divergence forming between the Federal Reserve and the European Central Bank, with the Fed eying up to four more hikes before the ECB even begins to raise rates even once. This perception hasn't changed; but the reappearance of trade war fears has momentarily shifted attention from central banks.
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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