The U.S. dollar has recovered from its multi-year low, rising to its highest level in a month this week as the markets continue to weigh up the Trump administration's trade policies. So, is a floor for the USD, and can the USD extend its recovery against its major peers to levels seen pre-Liberation Day trade tariff announcements?
This article will explore what’s driving the dollar’s rebound — from easing trade tensions to shifting inflation expectations — and how traders can navigate these developments with PrimeXBT’s expanded Forex offering and access to global markets.
Trade war de-escalation
The worst-case scenario in trade tariffs appears to have been avoided. In trade talks in Switzerland, the US and China agreed to a 90-day ceasefire. The US agreed to reduce tariffs to 30% on Chinese imports, down from 145%. China also dropped tariffs on imports from the US to 10%, down from 125%. These moves brought tariffs back to pre-liberation day levels, marking a significant de-escalation in the US-China trade war while also surpassing expectations.
With tariffs at these more sustainable levels, a return to more or less normal trade is expected, with exporters, importers, and consumers likely to absorb the impact of the levy.
The developments came after the US and the UK announced a trade agreement last week, and Trump agreed to more deals with Saudi Arabia in the first leg of his three-nation visit to the Middle East.
Trade deal news has been welcomed by the USD, which has risen from a 3-year low on April 21 at 98.00 against a basket of currencies to just shy of 102. Safe havens, the Japanese yen and the Swiss Franc, were hit the hardest, which makes sense given that they benefited the most from the sell-America trade. EUR/USD has also fallen to 1.11, a monthly low.
US CPI cools to lowest level since 2021
While a full-on trade war with China appears to have been avoided, which is supporting the USD, cooler US inflation in April raises questions over the impact of tariffs. US CPI eased to 2.3% YoY in April, its lowest level since 2021, and the third straight month that inflation cooled by more than expected. This suggests that inflation data, at least for now, is not showing the impact of Trump’s trade tariffs. This may take several months to start showing through in hard data.
Interestingly, China’s April trade data showed that exports to the US held up relatively well, considering the tariffs imposed. This suggests that the impact of tariffs sat with US businesses and potentially consumers if the higher prices were passed on. Data over the coming months will clarify, but the initial sense is that inflation should be manageable this year. The market is pricing in 56 basis points of cuts this year, down from 100 basis points expected a few weeks ago.
Will the USD extend its recovery?
For now, the de-escalation of the trade war and Trump's trade deals mean the narrative for asset reallocation away from the USD (sell America trade) has been paused supporting the USD, at least until hard data shows the extent to which the uncertainty created by the Trump administration’s trade policy has hit the economy. As a result, despite cooling inflation, a floor for the USD could be in for now. The market would need to see signs of weaker data or a more dovish stance from the Federal Reserve to break below 98 and create a lower low. More trade deals and confirmation of more progress in talks with China could lift USD further.
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