**US Dollar Weekly Forecast: Tariffs and Fed Cloud the Outlook**
*Adapted from Justin McQueen, FXStreet*
The US dollar enters the new week at a crossroads, weighed down by shifting economic policy winds and global trade tensions. Market participants are keenly focused on the Federal Reserve’s future direction and the continually evolving landscape of US-China tariffs, both of which are providing a shifting backdrop for the world’s reserve currency. In this week’s outlook, we analyze recent data, break down expectations for monetary policy, and assess how prospect of further tariffs and subdued growth elsewhere are influencing USD’s prospects.
## The US Dollar: Recent Performance and Context
The US dollar has withstood considerable volatility in the past few months. After an impressive run in late spring, the greenback retreated as investors reassessed the likelihood of additional tightening from the Federal Reserve. Despite these corrections, the currency’s broad measures remain elevated relative to pre-pandemic levels.
Several core factors are at play:
– **Resilience in the US economy**, particularly consumer spending and labor markets, have underpinned dollar strength
– **Sticky inflation data** has complicated the Federal Reserve’s transition from a hawkish to a dovish policy stance
– **Persistent global uncertainty** over trade and geopolitics has maintained safe-haven demand for the dollar
Yet, this past week saw a bout of selling pressure on the US dollar. Softer-than-expected US Consumer Price Index (CPI) figures released midweek triggered a sharp drop in Treasury yields and weighed on the greenback. However, the outsized political developments regarding trade and tariffs have added further complexity to the dollar’s outlook.
## US-Chinese Trade Tensions Remain in Focus
Markets remain hypersensitive to headlines surrounding US tariffs on Chinese exports. As the administration considers imposing levies on a wide swath of goods, including key sectors like electric vehicles, batteries, and solar components, risks to the global trading environment remain high.
**Key Issues Surrounding Tariffs:**
– The proposed tariffs represent a **strategic effort to protect critical sectors** deemed vital to US competitiveness, such as technology and green energy
– US officials have signaled willingness to take a tougher stance on Chinese commercial practices, particularly forced technology transfers and state subsidies
– The steady escalation of trade barriers has prompted fears of retaliation, with Beijing vowing to protect its own economic interests
– Supply chain disruptions and input price spikes arising from tariffs could eventually bleed into broader inflationary pressures
Markets have not yet fully priced in the impact tariffs might have on US inflation and global trade volumes. Should tariff escalation continue, analysts anticipate upward pressure on US consumer prices, potentially complicating the Federal Reserve’s policy path and creating new risks for dollar volatility.
## Federal Reserve’s Dovish Drive Faces Obstacles
The Federal Reserve’s journey toward policy normalization is at a delicate stage. The softer CPI report underscored the argument that the central bank’s aggressive tightening campaign is having its intended effect, raising hopes of imminent rate cuts.
**Recent Data Highlights:**
– Headline US CPI rose by 3.2 percent year-over-year, marking a sluggish moderation versus previous readings
– Core inflation, excluding food and energy, remains above the central bank’s comfort zone
– Labor market data still shows robust employment trends, with unemployment holding near multidecade lows
**Current Fed Policy Outlook:**
Despite inflation progress, FOMC members remain cautious. Several board members have highlighted that more convincing evidence is needed before pivoting to rate cuts. At the last policy meeting, the Federal Reserve left its benchmark rate unchanged, reinforcing a data-dependent stance.
Market expectations for 2024 have swung back and forth:
– Early-year consensus suggested as many as four rate cuts by year-end
– Elevated inflation and robust employment prompted a trimming of rate-cut expectations
– This week’s CPI data reignited some hope for easing, though odds remain finely balanced
As a result, yield different
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