- The US Dollar edges lower across the board on Monday’s trading.
- TWD surges 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.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, edges lower and remains capped below the 100.00 level 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: A lot of moving parts again
- 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.
- At 13:45 GMT, April’s final reading of the S&P Global Services Purchase Managers’ Index (PMI) will be released. Expectations are for a steady 51.4 reading.
- At 14:00 GMT, the Institute for Supply Management (ISM) will release its April PMI for the Services sector:
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- The Services PMI headline is expected to dip to 50.6, coming from 50.8 in March.
- The Services New Orders Index was at 50.4 and the Services Employment Index at 46.2 in March, with no forecasts for April available.
- Equities are all over the place while several countries in Asia remain closed for a public holiday. European indexes are up around 0.50% on the day. US futures look under pressure with the Nasdaq down near 1%.
- 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 4.31%, erasing past weeks’ softening as traders have even priced out the chances for a June rate cut.
US Dollar Index Technical Analysis: And that was only Taiwan…
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
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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