US Dollar Index Drops 2% as Tariffs Fuel Inflation Concerns

Macroeconomist Raoul Pal suggests that the weakening of the US dollar could lead to significant upswings in volatile assets such as stocks and cryptocurrencies. Pal highlights the US Dollar Index’s recent decline and its potential to drop below 90, which could trigger a substantial rally across various asset categories. This scenario is supported by an improving economic cycle that could boost disposable income levels for individuals and companies, thereby increasing demand for higher-risk investments. Analysts concur that these conditions, combined with a weakening dollar, could drive significant price movements in the market.

Pal also points out that a rise in global liquidity could further inflate asset valuations. Governments may need to increase the money supply to address high debt levels, potentially setting the stage for upward financial market movements. Both conventional financial instruments and cryptocurrencies could benefit from these changes. The trajectory of the US dollar will heavily influence investor behaviors and the global economy, with fluctuations in the Dollar Index remaining a crucial determinant in market dynamics.

While Pal does not provide specific timelines for economic recovery and financial conditions’ progression, he advises keeping a close watch on central banks’ approaches, monetary policies, and global economic shifts. Key takeaways from Pal’s analysis include monitoring the continued softening of the US dollar and increases in global liquidity, recognizing that a weaker dollar may lead to volatility in stocks and digital assets, and carefully tracking economic data and central bank actions.

As the potential weakening of the US dollar intertwines with escalating global liquidity, these factors could introduce volatility for risky assets like stocks and cryptocurrencies. Investors are advised to remain alert to market trends during this sensitive period. Pal’s analysis provides crucial insights for crafting investment strategies in conjunction with shifting economic recovery and monetary policy landscapes. Observers acknowledge the importance of understanding current market conditions and preparing for volatility.

The US Dollar's decline has sparked discussions among analysts about its potential impact on global markets. The dollar's weakening has been influenced by various factors, including aggressive tariffs and debt concerns. The impact of a neutral dollar on commodities, which are typically priced in USD, could lead to more stable or even rising commodity prices. This, in turn, could impact inflation and production costs, adding to the complexity of the economic landscape.

The US Consumer Price Index (CPI) release is a critical event that market participants are closely watching. The June CPI is expected to rise by 0.3% from the previous month, while the Core CPI is projected to rise by 3.0% year-over-year. These figures are significant as they provide insights into the impact of tariffs on consumer prices. Economists expect headline inflation to rise to 0.3% month-over-month, which would be the biggest monthly gain in five months. The annual inflation rate is expected to rise to 2.7% from 2.4% in May. The core CPI, which excludes food and energy prices, is projected to rise to 3.0% year-over-year, up from the 2.8% advance in the previous month. The expected increase is partly due to rising costs resulting from recent US tariffs, which are being passed on to consumers through higher prices.

Fed Chair Jerome Powell has stated that uncertainty over the impact of tariffs is one of the main reasons why the central bank has held off on cutting interest rates. Powell highlighted that the Fed “went on hold when we saw the size of the tariffs,” and now intends to assess how deeply tariffs will filter through to consumer prices and growth before easing monetary policy. While some Fed officials believe the tariffs may cause only a temporary rise in prices, many are worried that the inflation effects could be more lasting, making it harder for the Fed to lower rates in the near term.

The broader market tone remains cautious amid ongoing tariff threats. Investors are awaiting the US CPI data for fresh directional cues. The US CPI report for June is scheduled for release, and its significance is heightened by current economic conditions, particularly concerns surrounding the impact of tariffs on consumer prices. A hotter-than-expected CPI print could dampen hopes for near-term interest rate cuts, while a softer reading may revive expectations for a dovish pivot from the Fed.

The US Dollar Index (DXY) is trading modestly lower, hovering near the 98.00 psychological mark. While the index remains supported, it faces a confluence of key technical resistance at current levels, discouraging traders from placing aggressive bets. The broader market tone stays cautious amid ongoing tariff threats, while investors await the US CPI data for fresh directional cues.

The yield on the benchmark US 10-year Treasury note held steady above 4.43%, marking a one-month high as investors await today’s June CPI report. The sustained rise in yields reflects ongoing expectations that inflation may remain elevated due to tariff-related pressures, signaling that the Federal Reserve could delay interest rate cuts until price growth shows clearer signs of cooling.

The second-quarter earnings season in the US begins this week, with major banks scheduled to report their results. Investors are closely monitoring the impact of rising costs and trade tensions on companies. Analysts expect modest earnings growth of about 5.8% year-over-year, well below the 10.2% estimate seen in early April, underscoring the impact of tariff-related uncertainties on corporate profits.

US President has once again targeted the Fed Chair, calling him a “knucklehead” and criticizing him for keeping interest rates too high. The President argued that rates should already be closer to 1% and claimed that the Fed Chair is hurting the economy by refusing to move faster on rate cuts. In addition to his policy criticism, the President’s remarks come as his administration probes the Fed’s recent headquarters renovation project, suggesting the costs were excessive and hinting at the possibility of firing the Fed Chair “for cause.”

The Supreme Court has signaled that a president cannot remove a Fed Chair simply for policy disagreements, but misconduct or mismanagement could be grounds for removal. However, the White House National Economic Council Director has stated that this issue is "being looked into" to determine if it provides sufficient cause. According to The Washington Post, the Director is emerging as a leading contender to succeed the Fed Chair. The Director supports the President’s push for lower rates and risks being seen by the markets as lacking policy autonomy.

The US Dollar Index (DXY) is trading near the 98.00 psychological level as investors await the release of the June CPI report. Over the past two weeks, the index has been recovering steadily, supported by the 9-day moving average. The price is currently testing the upper boundary of the wedge near 98.00, but bullish momentum appears tentative ahead of the inflation data. Bulls would need a strong push, possibly from a hotter-than-expected CPI report, to decisively break above 98.00 and reinforce the short-term bullish correction. If that happens, we could see the DXY head toward the 98.80-99.00 zone in the near term.

Momentum indicators reflect a cautious tone. The Relative Strength Index (RSI) is hovering flat around the neutral 50 level, indicating a lack of strong buying interest. Meanwhile, the Average Directional Index (ADX) remains weak, reflecting a lack of clear trend strength. Overall, any big moves hinge on the upcoming inflation data. A hotter-than-expected CPI reading could provide the fuel needed for a bullish breakout above wedge resistance, reinforcing the case for reduced Fed interest rate-cut expectations and lifting the Greenback. Conversely, a softer CPI print may trigger a pullback, with immediate downside support seen near the 9-day EMA and the lower wedge boundary.

The Consumer Price Index (CPI) is a key indicator to measure inflation and changes in purchasing trends. Generally, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish. The Federal Reserve (Fed) has a dual mandate of maintaining price stability and maximum employment. According to such mandate, inflation should be at around 2% year-over-year and has become the weakest pillar of the central bank’s directive ever since the world suffered a pandemic, which extends to these days. Price pressures keep rising amid supply-chain issues and bottlenecks, with the Consumer Price Index (CPI) hanging at multi-decade highs. The Fed has already taken measures to tame inflation and is expected to maintain an aggressive stance in the foreseeable future.