Talking Points:

- Instead of blocking Chinese companies from investing in American companies outright, the Trump administration will now use CFIUS to oversee purchases by foreigners.

- The slight change in tactic is seen as a much less aggressive approach towards China, suggesting that a US-China trade war may never truly materialize.

- 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 working on its second day of gains in a row as concerns about a full-blown US-China trade war continue to diminish thanks to a change in tactics by the Trump administration.

By choosing to use the Committee on Foreign Investment in the United States (CFIUS) to handle ownership transactions with Chinese buyers - thereby including the US Congress in the decision making- the Trump administration is taking a much less aggressive stance towards China than previously thought.

If the US executive branch is no longer acting unilaterally on trade issues and instead working with a legislative branch that is more open to free trade, odds of a serious trade war developing with China have dropped.

Generally speaking, such a change in tactic should be considered a positive development for the US Dollar, as a US-driven trade war would be a net-negative for the US Dollar. The news overnight is indeed producing a bullish reaction by the greenback, and as would be expected given that the US Dollar is trading like a risk currency, US equity futures are trading higher alongside the buck.

DXY Index Price Chart: Daily Timeframe (July 2017 to June 2018) (Chart 1)

US Dollar Gains Build as Trump Changes Tactics on Trade

The bounce by the US Dollar over the past two days has come at a critical time for the DXY Index, with price having fallen back 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.

More evidence that a US-China trade war will be avoided could be the catalyst necessary to help the DXY Index return back to its highs from earlier this month; for now, the bearish daily key reversal high at 95.53 is formidable resistance before the uptrend can be declared as having been resumed.

Read more: Euro Forecast: Euro Turn to June CPI for Next Catalyst

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

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