- The US Dollar gets another correction on Monday after a volatile weekend of geopolitical headlines.
- TWD pops over 5% in a very illiquid market while the Taiwanese central bank holds an emergency press conference.
- The US Dollar Index remains capped below 100.00 and is still stuck in a wait-and-see range for a breakout.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, edges lower to Friday’s low around 99.62 at the time of writing on Monday, after the Taiwan Dollar (TWD) surges over 5% and triggers a spillover effect in Asian currencies against the Greenback. It is the biggest intraday gain in over three decades, on speculation that exporters are rushing to convert their holdings of US Dollars to the island’s currency, according to Bloomberg. All this occurs in a very illiquid market with several Asian countries, such as China, and the United Kingdom, closed for a public holiday.
The move opens up an interesting element in the tariff talks that are taking place between the United States (US) and Taiwan. One of the reasons exporters are buying Taiwan Dollars is that they expect the authorities will allow the currency to appreciate to help reach a trade deal with the US. Taiwan’s government said Saturday its negotiation team had conducted the first round of meetings with the US on May 1, though no details were released.
Daily digest market movers: ISM helps soften the blow
- The Monday press conference from the Taiwan central bank was a panic call from its governor Yang Chin-long. “We solemnly urge market commentators not to speculate irresponsibly about the foreign exchange market, as such comments can destabilize the market and potentially impact the broader economy” the governor commented, Bloomberg reports.
- On Sunday, US President Donald Trump suggested that his administration could strike trade deals with some countries as soon as this week, offering the prospect of relief for trading partners seeking to avoid higher US import duties, Reuters reported.
- The European Union is set to propose measures to ban Russian Gas imports by the end of 2027, as the bloc pushes to sever ties with the country that was once its biggest energy supplier, Bloomberg reports.
- Japan’s Finance Minister Katsunobu Kato said the country will not use the sale of its US Treasury holdings in trade talks with the Trump administration, retracting earlier statements from last week, Bloomberg reports.
- Israel has started a massive ground offensive that looks to be bearing as goal the full control of the Gaza region.
- Amidst all these headlines and events, the US Dollar is losing territory, with several traders pointing out that the Greenback is no longer considered to be a safe haven for markets, Bloomberg reports.
- At 13:45 GMT, April’s final reading of the S&P Global Services Purchase Managers’ Index (PMI) was released. The Services component fell to 50.8, where a steady 51.4 was expected from the preliminary reading.
- The Institute for Supply Management (ISM) has released its April PMI for the Services sector:
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- The Services PMI surged to 51.6, an upbeat surprise from the expected 50.6, coming from 50.8 in March.
- The Services New Orders Index jumped to 52.3, coming from 50.4 and the Services Employment Index came in at 49, beating the 46.2 in March.
- Equities are seeing some recovery in the US equities on the back of those upbeat ISM readings, with the Nasdaq down by 0.70%. In Europe the German Dax is set to close up around 1.00% on the day.
- The CME FedWatch tool shows the chance of an interest rate cut by the Federal Reserve in May’s meeting stands at 3.2% against a 96.8% probability of no change. The June meeting sees a 31.8% chance of a rate cut.
- The US 10-year yields trade around 4.35%, erasing past weeks’ softening as traders have even priced out the chances for a June rate cut.
US Dollar Index Technical Analysis: That was the smaller one
The US Dollar Index (DXY) is moving due to a bunch of spillover and domino effects from the Taiwan Dollar. Although it is not part of the Index, other currencies in the Asian region follow, with the Japanese Yen (JPY), which accounts for 13.6% of the DXY, currently trading nearly 1% stronger against the Greenback. A side effect of the demands from the Trump administration, urging exporting countries to appreciate their currency as one of the demands to avoid tariffs, hits. In turn, this revaluation weakens the Greenback, and this was only Taiwan.
On the upside, the DXY’s first resistance comes in at 100.22, which supported the DXY back in September 2024, with a break back above the 100.00 round level as a bullish signal. A firm recovery would be a return to 101.90, which acted as a pivotal level throughout December 2023 and again as a base for the inverted head-and-shoulders (H&S) formation during the summer of 2024.
On the other hand, the 97.73 support could quickly be tested on any substantial bearish headline. Further below, a relatively thin technical support comes in at 96.94 before looking at the lower levels of this new price range. These would be at 95.25 and 94.56, meaning fresh lows not seen since 2022.
US Dollar Index: Daily Chart
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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