The US Dollar (USD) posted a modest rebound on Tuesday, regaining ground lost during the Asian session after President Donald Trump extended the tariff deadline for 14 countries from July 9 to August 1. The announcement injected short-term optimism into markets, temporarily calming global trade fears and lifting demand for the Greenback.
The US Dollar Index (DXY), which had dipped to an intraday low of 97.18, recovered to 97.77 in the American session. While initial risk aversion had sparked safe-haven buying, the delay and potential for negotiations pulled traders back into risk-on territory, dampening the urgency to bid up USD aggressively.
Trump’s 14-Letter Blitz: Tariffs Loom, But Diplomacy Possible
On Monday evening, Trump posted trade warning letters on Truth Social to 14 countries, including Japan, South Korea, Bangladesh, Tunisia, and Serbia. The letters outlined new “reciprocal” tariffs—some increased, some lowered, and others unchanged—set to take effect on August 1, unless alternative trade terms are reached.
The countries impacted include:
- Tariff increases: Japan (25%), Malaysia (25%)
- No change: South Korea (25%), Indonesia (32%)
- Tariff decreases: Kazakhstan (25% from 27%), Cambodia (36% from 49%), Laos (40% from 48%), Myanmar (40% from 44%)
- Stable high rates: South Africa (30%), Thailand (36%)
The mixed approach signals Washington’s intent to pressure partners without fully severing trade channels, leaving open the possibility of negotiated settlements—a factor that buoyed market sentiment.
TACO Theory Gains Traction: Trump Always Chickens Out?
A term now circulating among traders—“TACO” (Trump Always Chickens Out) aptly captures market skepticism toward the administration’s tariff threats. The narrative is rooted in repeated patterns: aggressive tariff threats, followed by delays, and then partial rollbacks or softened deals.
This skepticism has tempered the safe-haven demand for USD, as investors suspect Trump’s trade strategy may focus more on leverage than enforcement. Traders are now less likely to front-load USD positions solely on protectionist threats, especially without clear signs of follow-through.
Short-Term Strength, Long-Term Fragility for the Dollar
While the Dollar bounced back Tuesday, its long-term fundamentals remain shaky. Rising fiscal deficits, ballooning national debt, and expectations of Federal Reserve rate cuts are weighing heavily on the Greenback’s outlook.
The 2025 federal deficit is projected to approach $2 trillion
Public US debt is nearing $30 trillion, raising concerns about sustainability
Fed funds futures imply 100 basis points of rate cuts over the next year.
These factors are likely to dampen demand for USD-denominated assets, especially among long-term foreign investors, and could gradually erode the Dollar’s dominance in global financial markets.
Fed’s Credibility Tested by Dual Pressures
The Federal Reserve faces conflicting challenges:
1. Sticky inflation, possibly worsened by tariffs
2. Slowing global growth, worsened by those same tariffs
3. Mounting fiscal imbalance
4. Political pressure, with Trump critical of the Fed’s tightening bias
With markets pricing in four rate cuts by mid-2026, the Fed’s next steps are highly uncertain. Any misstep could cause market volatility and a re-pricing of USD assets.
Active Trade Negotiations Could Delay Escalation
Markets found reassurance in signs of ongoing trade talks between the US and major economies:
EU–US Talks: EU Commission President Ursula von der Leyen reported a “good exchange” with Trump. The EU hopes to secure a lower tariff rate (~10%) or outright exemption.
US–India Talks: The US delayed 26% tariffs on Indian exports, especially textiles and leather. A mini-deal is reportedly near, possibly this week.
Partial Agreements:
UK: Deal on steel and aluminum in June, though quotas are still under negotiation
Vietnam: Duty-free access for US goods; accepted 20% and 40% tariffs on select exports
China: Framework agreed to reduce tariffs on steel and electronics, and expand rare earth access
These developments suggest that Trump’s trade stance remains negotiable, with economic and geopolitical pragmatism still guiding final decisions.
Global Reserve Currency Role at Risk?
The Dollar’s role as the world’s primary reserve currency is increasingly under scrutiny:
Several countries, including China and Russia, are actively pursuing de-dollarization.
Trade tensions may force developing countries to diversify reserves into gold, Euros, or Chinese Yuan.
As the US trade deficit narrows, fewer Dollars circulate globally, reducing the need for foreign economies to recycle trade surpluses into USD assets.
While the Dollar retains deep market liquidity and legal protection, these slow structural shifts could erode its long-term dominance.
Technical View: US Dollar Rebounds but Faces Resistance Near 98.00
The US Dollar Index’s bounce to 97.77 reflects near-term strength, but upside is capped by resistance at the 98.00 psychological level.
Immediate support: 97.20
Critical resistance: 98.00–98.10 zone
Indicators: RSI near 53 (neutral), MACD shows early bullish crossover.
If upcoming FOMC minutes show hawkish caution, DXY may breach resistance. But dovish hints could trigger a pullback toward 97.00 or even 96.50.
