Dollar's Rally Amid Tariff Deadline Delay: Sustained Strength or a Fade?

The U.S. Dollar Index (DXY) has found temporary reprieve after the U.S.-China tariff deadline was pushed back to August, sparking a 0.8% rebound to 97.80. Yet beneath this short-term volatility lies a deeper narrative: the DXY's technical structure and structural vulnerabilities suggest this rally may be fleeting. Let's dissect the interplay of geopolitical trade dynamics and technical analysis to determine whether the greenback's bounce can transcend the 98.00 resistance barrier or succumb to long-term headwinds.

The Technical Setup: Falling Wedge and Resistance Realities

The DXY's recent rebound has rekindled hopes of a sustained rebound, but technical indicators tell a cautionary tale. The currency remains trapped in a falling wedge pattern (see chart), a consolidation phase that typically precedes a breakout. Here's what traders must watch:

1. Near-Term Resistance at 98.00: This level acts as the upper boundary of the falling wedge and aligns with the February 2025 descending trendline. Breaking above it could target the 99.50 resistance (the 2023 swing low), but this requires sustained momentum.
   

2. Volume and Momentum Lag: Recent gains have occurred on low volume, raising doubts about conviction. The RSI(14) remains in neutral territory (around 50), while the MACD histogram shows no bullish divergence. Without volume confirmation, a breakout above 98.00 risks fizzling into a false rally.

3. Support at 97.00–96.50: A failure to hold 98.00 could trigger a drop toward this zone, where the March 2020 swing low and 2022 low converge. Below this, the 94.60 multi-year support zone beckons—a level that, if breached, would signal a resumption of the 2025 downtrend.

Geopolitical Dynamics: Tariff Delay and "TACO" Skepticism

The DXY's rally is tied to the July 9 tariff deadline delay, which reduced near-term uncertainty. However, two critical factors undermine its safe-haven appeal:

1. Fiscal Deficit Pressures: The U.S. federal deficit is projected to hit $1.9 trillion in fiscal 2025, exacerbating concerns over the TACO (Treasury's Ability to Continue Operations). This skepticism weakens the USD's status as a "cleanest dirty shirt" in a world of global fiscal strains.

2. Trade Policy Uncertainty: While the delay eases immediate risks, the August deadline looms, and U.S. tariffs on Chinese goods remain a Sword of Damocles. A delayed or scaled-back tariff rollout could reignite dollar selling, especially if equity markets stabilize.

Structural Headwinds: Fed Cuts and Reserve Currency Erosion

Even if the DXY breaches 98.00, two long-term trends argue against sustained strength:

1. Fed Policy Shift: With the federal funds rate at 4.50%, the Fed is under pressure to cut rates by year-end. A dovish pivot would weigh on the USD, particularly if global growth stabilizes.

2. Reserve Currency Erosion: The USD's share of global reserves has fallen to 52%, its lowest since 1995. Central banks' diversification into the euro, yen, and digital currencies signals a structural decline in dollar demand.

Investment Strategy: Short USD Against EUR/JPY Ahead of August Deadline

Traders should exploit this technical-geopolitical crossroads with a selective short bias:

1. Target Pairs:
2. EUR/USD: A break above 1.1200 (resistance) would confirm a bearish DXY trend. Short EUR/USD at 1.1150, aiming for 1.1400, with a stop above 1.1250.

3. USD/JPY: The yen benefits from yen-carry unwind and safe-haven flows if risk appetite wanes. Short USD/JPY at 145.50, targeting 143.00, with a stop above 146.00.

4. Risk Management:

5. Technical Barriers: Use the 98.00 DXY resistance as a stop-loss trigger for USD shorts.
6. Event Risk: Hedge positions ahead of the August tariff decision and August 10 Fed minutes release.

Conclusion: Rally to Fade, Bearish Bias Intact

The DXY's rebound to 97.80 is a tactical opportunity to position for a decline, not a signal of sustained strength. While geopolitical delays provide temporary relief, structural flaws—fiscal deficits, reserve erosion, and Fed easing—favor a bearish outlook. Traders should focus on short USD positions against EUR/JPY, with stops above 98.00 and targets tied to the August deadline. The dollar's era of dominance is fading; the next move below 94.60 could mark a new low for the "cleanest dirty shirt."