The US Dollar is on a downward trend, continuing its three-day decline as traders remain cautious ahead of an August tariff deadline. A trade agreement between the US and Japan has brought some optimism, but the dollar is still under pressure due to political issues surrounding the Federal Reserve. The US Dollar Index (DXY) is currently around 97.20, having dipped after failing to surpass 97.50. This week, the index has decreased by about 1.30%, moving away from nearly four-week highs.

US-Japan Trade Agreement

President Trump has revealed a trade deal with Japan that reduces tariffs on Japanese goods from 25% to 15%. Japan has committed to investing $550 billion in the US, with 90% of the profits intended to support American industries. The EU is close to finalizing a trade deal with the US, discussing a flat 15% tariff on some products. If negotiations stall, the EU is ready with €93 billion in backup tariffs. US Existing Home Sales fell by 2.7% in June, marking the slowest pace since September 2024. The median home price is now $435,300, making it harder for many to afford homes. Fed Chair Jerome Powell is facing criticism from President Trump, but there is still support for him to remain in his role until his term ends in May 2026.

Investment Strategy Amid Market Volatility

The Dollar Index’s struggle to break through the 97.50 mark suggests weakness, indicating a likely downward trend. Traders might want to consider strategies that benefit from a falling dollar, such as buying put options or taking short positions in currency futures. The recent 1.30% drop this week backs up this bearish view. The scrutiny on Powell could heighten market volatility, especially with major economic announcements coming up. According to the CME FedWatch Tool, the market now anticipates a rate cut in the next quarter with over a 60% probability, reflecting this pressure. We recommend using options to take advantage of increased price fluctuations, especially around the August tariff date. With the trade agreement with Japan, the yen is expected to strengthen against the dollar, making a short USD/JPY position appealing. The situation with the European Union is less predictable, so a strategy that benefits from significant price movements in either direction on the EUR/USD pair could be effective. The €93 billion in potential tariffs poses a considerable risk that could lead to drastic market changes. The decline in existing home sales to its slowest rate since September 2024 clearly shows an economic slowdown. Historically, a weak housing market, similar to the downturn from 2006 to 2007, often leads to looser monetary policy. This trend supports our belief that the central bank will face increased pressure to bolster the economy, further impacting the US dollar. Create your live VT Markets account and start trading now.

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