US Dollar Edges Lower Amid Trade Tensions and Deficit Concerns

The US dollar started the week on a bearish note, losing value as investors grapple with lingering deficit concerns and renewed trade tensions. Although US President Donald Trump has backed away from a proposed 50% tariff on European Union (EU) goods, markets are cautious about potential fallout.

According to ING, analysts believe markets had already moved past the initial shock of April’s tariff-related risks, focusing instead on possible trade deals in the months ahead. However, the latest standoff with the EU has brought those concerns back into view, prompting doubts about US tariff policies and their impact on the global economy.

ING Analysts Weigh In

"If there’s a lesson from April, it’s that the dollar bears the brunt of tariff drama," ING noted in a recent report. The bank’s analysis suggests that despite short-term valuation models indicating the greenback remains undervalued – by approximately 4% against major currencies such as the euro, pound, and Canadian dollar, and around 3% against the yen and Australian dollar – those models are currently of limited use.

"The dollar isn’t trading in line with typical macroeconomic drivers," ING’s team observed. "In many respects, it’s behaving more like an emerging market currency," they added, highlighting investor concerns over fiscal sustainability and unpredictable policy actions. As a result, the traditional correlation between bond yields and the US Dollar Index has broken down.

• A 60-day correlation analysis of 10-year Treasury yields and the US Dollar Index reveals that their connection started strong at around 0.68 in January but has since dwindled to zero.
• ING stressed that short-term valuation models are often unreliable when the dollar deviates significantly from historical macroeconomic trends.

Focus on Economic Data

With trading volumes muted by US and UK holidays, markets await clearer signals today as a batch of key economic data is scheduled for release. Analysts at ING believe Tuesday’s Conference Board Consumer Confidence Index will be closely watched, with expectations pinned at around 87 – up from April’s figure but still shy of the historical average.

A recovery above the 90 mark might eventually alleviate concerns about growth risks and lead to dollar strengthening. However, without significant improvements in economic indicators, ING cautions that a retest of the 98.0 April lows in DXY appears more likely than a rebound to 100.0 at this time.

Other significant releases on the economic calendar include:

• March’s durable goods orders data, expected to show a pullback after last month’s strong reading
• Personal income and PCE inflation figures, potentially offering further insights into US economic performance