The US Dollar rose on Friday as global trade tensions increased from US tariff threats. The US Dollar Index (DXY), which measures the Dollar against major currencies, stayed stable during the American session but ended the day up by 0.30%. It’s poised to gain more than 0.8% for the week, although it runs into resistance at certain technical points. The US has issued tariff warnings to over 20 countries, including Canada, Japan, and South Korea, with tariffs ranging from 15% to 50%. Trump announced a 35% tariff on Canadian imports starting August 1, claiming trade imbalances. This move is intended to encourage Canada to finalize a new trade deal by July 21, following earlier discussions between Trump and Canadian officials.

Trade Tensions and Economic Impacts

In 2024, the US’s main trading partners, the EU and Canada, imported over $600 billion and $400 billion in US goods, respectively. The 10-year US Treasury yield stabilized at 4.36%, reflecting cautious sentiment amid these trade tensions. While expectations for Fed interest rate cuts have faded, the US Dollar remains strong due to a robust labor market and lower-than-expected jobless claims. US Fed officials noted that tariffs may not significantly raise consumer prices, with limited inflation impacts seen so far. The Fed’s decisions depend on data, and the upcoming US CPI report on July 15 could affect market direction. Analysts expect a 0.3% month-on-month increase, which could change rate cut expectations and influence the US Dollar. The US Dollar is solidifying its recent gains amid trade uncertainty and stable fixed income. The market seems to be pricing in trade risks without a clear direction. The Dollar’s movement was muted during the US session on Friday, but early positioning indicated that traders were more focused on protection than opportunity. A 0.30% daily increase in the Dollar Index may seem small, but in a quiet session with nearby resistance levels, it shows cautious optimism rather than widespread confidence. Trump’s announcement of a 35% tariff on Canadian goods is still weeks away, but it has already affected risk assets. He has previously used trade threats; however, this time the urgency to finalize a new trade agreement is more pronounced given the July 21 deadline. While this strategy seeks to enhance negotiation leverage, markets tend to react before deadlines actually arrive. Fixed income traders are also aware of the geopolitical landscape. The 10-year Treasury yield at 4.36% reflects selective capital movements rather than a relaxed market, keeping yields steady amidst safe-haven interest and decreasing Fed easing expectations. Soft US jobless claims have tempered aggressive policy shift projections, as the labor market remains strong.

Trading Strategies and Market Outlook

For those trading rate-sensitive instruments, the focus should shift to the July 15 CPI report. If it shows a rise above the consensus of 0.3%, it could lower the likelihood of near-term rate cuts, boosting the Dollar further. A softer report might lead to adjustments in interest rate futures, which currently expect only minimal policy changes later this year. Recent sessions have changed how traders view inflation in light of tariffs. Discussions within the Federal Reserve suggest that the price pressures from trade actions remain low. This allows them to maintain a careful stance. However, this outlook depends heavily on the CPI staying close to expectations. If the CPI diverges, especially with signs of long-lasting price pressures, the assumption of limited impact will need to be reconsidered. Tactically, focusing on short-to-intermediate positions seems wise. Traders should prepare for the CPI release by planning for both potential outcomes. The Dollar Index is nearing resistance levels close to recent highs—if it breaks through and stays above this range, momentum strategies may kick in soon. Trade desks should watch yen and euro pairings closely, as recent positioning imbalances have occurred. If the US does not immediately expand its tariff scope, these pairs could stabilize. However, this opportunity is narrow and relies on the trade rhetoric either escalating or quieting down in the next 10 to 14 days. There is little room for complacency. While implied volatility is currently below long-term averages, the upcoming data and global reactions to US trade actions could rapidly change this landscape. Holding optionality, both literally and figuratively, is more critical than ever. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now