The US Dollar (USD) saw a drop on Friday during a trading session with low activity due to the Independence Day holiday in the United States. Despite strong US Nonfarm Payrolls data that had initially boosted the currency, the USD is now losing value. The US Dollar Index is around 97.00, down from a high of 97.42.

US Fiscal Concerns

Traders are weighing strong job data against risks linked to US tariffs and new tax-and-spending legislation. The bill passed narrowly, 218-214, and is expected to worsen the budget deficit, raising concerns about US financial stability. Ongoing tensions from tariffs, driven by President Trump’s actions, add to market uncertainty. Although the bill will soon be law, it has sparked political debate and worries about its long-term economic impact. It offers tax breaks and increased spending on defense and border security but cuts Medicaid and food stamp funds. The Congressional Budget Office predicts the bill will add $3.4 trillion to the deficit over ten years, pushing the debt-to-GDP ratio from 97.8% to 125%. Discussions on US-China tariffs have led to a framework deal easing some restrictions, though details are still unclear. Additionally, India plans to impose retaliatory tariffs on the US, increasing global trade tensions. Nonfarm Payrolls data for June showed a gain of 147,000 jobs, lowering the unemployment rate to 4.1%. This report has reduced expectations for a Federal Reserve interest rate cut, making a July cut less likely. Treasury Secretary Scott Bessent criticized the Fed’s rate decisions, pointing out high real rates amid other conditions. The US Dollar Index remains below 97.00 after a failed recovery attempt, under a bearish technical setup. Unless it breaks above 97.00–97.20, pressure on the index will continue. Key indicators suggest ongoing selling pressure, with potential downside to 95.00 if the immediate support at 96.30 fails.

Federal Reserve Policy Impact

The Federal Reserve aims for price stability and full employment, impacting the US Dollar through interest rate changes. With eight policy meetings each year, the Fed may use quantitative easing or tightening based on economic conditions, directly affecting USD value. US monetary policy decisions are vital for currency movements, financial market stability, and economic growth. The recent drop in the US dollar, despite strong hiring, indicates that market participants are focusing more on long-term fiscal risks. After the stronger-than-expected June payrolls report, the dollar initially rose but failed to maintain momentum. With the Index now below 97.00 and unable to hold above 97.20, the outlook remains negative. We observe a balancing act: On one hand, job growth is steady, with another 147,000 added in June, lowering unemployment again. Generally, this would boost the dollar, but it’s being countered by other pressures. The recently passed tax-and-spend bill created significant debate. Cutting welfare spending while increasing defense budgets may have political motives, but the market views it differently. Public borrowing needs are rising, with predictions showing a 125% debt-to-GDP ratio if current trends continue. For those in rate-sensitive strategies, changing sentiment regarding Federal Reserve actions is increasingly important. The chances of a rate cut in July have decreased, not just due to job data. The Treasury’s comments about the Fed’s policies highlight concerns about high real interest rates, even when some parts of the economy are showing softness. This criticism serves as a reminder that even with solid employment figures, other indicators—like corporate investment, housing, and industrial output—may point in different directions. Trade policy is now also significant. China’s and India’s moves to implement retaliatory tariffs are complicating matters. While there is a preliminary framework with China that could reduce trade restrictions, specifics are lacking, leaving room for sudden shifts in sentiment and price volatility, especially in lightly traded sessions. Technical indicators are dominating the situation. Until the dollar index can reclaim the area just above 97.00, risks lean toward the downside. Current indicators suggest continued selling, with immediate support at 96.30 looking fragile. If that support fails, a drop to 95.00 is possible in the near future. Future positioning should remain flexible. Relying too heavily on employment data is risky, especially with fiscal policy possibly influencing the Fed’s decisions. Monitoring bond market responses in the coming sessions may provide additional insights, particularly regarding inflation expectations and liquidity in funding markets. In the short term, market participants should pay attention to any indications from the Fed suggesting a shift toward tightening. This could temporarily strengthen the dollar, even if actual policy changes lag. However, without breaking above 97.20, selling pressures will continue. Traders should also consider upcoming inflation data and any further trade retaliation rhetoric from India or China, which could potentially increase dollar volatility. Timing is crucial, and with reduced liquidity around US holidays, movements can happen quickly. Create your live VT Markets account and start trading now.

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