Forex Today: US Dollar stays under pressure on last day of H1

The US Dollar Index continues its decline, falling over 1.5% last week and 12% year-to-date to its weakest level since March 2022, despite the Treasury Secretary reiterating a strong USD policy. This dollar weakness is contributing to a risk-positive market sentiment, reflected in gains for US stock index futures. Concurrently, a new UK-US trade deal officially came into force, reducing tariffs for key British sectors, while Canada announced it will rescind its digital services tax to advance broader trade negotiations with the US. Investors are also anticipating German inflation data, the Dallas Fed Manufacturing Index, and speeches from major central bank officials.

Analysis

The US Dollar is experiencing significant and sustained weakness, marking the primary driver of current market dynamics. The USD Index has fallen over 1.5% in the past week and approximately 12% year-to-date, reaching its lowest level since March 2022. This sharp decline persists despite the US Treasury Secretary's reiteration of a "strong USD policy," suggesting a disconnect between official rhetoric and market performance. This dollar weakness is fueling a risk-positive atmosphere, evidenced by gains of 0.4% to 0.6% in US stock index futures. In currency markets, the Euro and Swiss Franc have been the primary beneficiaries, with the USD depreciating by over 3% against both this month. Sterling is also firm, holding above 1.3700 against the dollar, supported by the implementation of a new UK-US trade deal that reduces tariffs for British auto and aerospace sectors. Further, positive developments in US-Canada trade, where Canada will rescind its digital services tax, are contributing to a lower USD/CAD. Investors are now focused on upcoming catalysts, including German inflation data and speeches from central bank officials, particularly ECB President Lagarde, which will provide further direction.

Key Decisions for Investors

• Given the persistent downward trend in the US Dollar, which has fallen 12% year-to-date, investors should consider maintaining or initiating short-USD positions, or hedging long-dollar exposure, against major currencies.
• The ongoing risk-on sentiment, coupled with specific positive catalysts like the new UK-US trade deal, suggests opportunities in non-USD assets; long positions in GBP and EUR could be considered, as these currencies show fundamental and technical strength against the dollar.
• Monitor upcoming economic releases, particularly German inflation data and the US Dallas Fed Manufacturing Index, as well as speeches from central bankers, as these events are key near-term catalysts that could accelerate or reverse current FX trends.
• Note the initial weakness in Gold despite a falling dollar, suggesting that traditional safe-haven correlations may be temporarily strained and warranting caution before assuming a direct inverse relationship.