- Trump’s tariffs triggered a 3% drop in the dollar, shifting market focus from inflation to growth risks.
- With rising costs and slowing exports, confidence in the dollar’s global role is fading.
- As key support levels break, a deeper slide looks likely—unless the Fed steps in.
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US Dollar (DXY) changed direction this month after Donald Trump announced new tariffs on many imports.
After Trump’s announcement on April 2, DXY dropped nearly 3% in just 24 hours, falling to 101.27. This wiped out all the gains made since the November 2024 elections and marked the steepest one-day drop since 2023. Since the start of the year, the index has lost 5.35% and is still trending downward. This shows that the usual economic expectations are not playing out.
Normally, tariffs are expected to raise inflation, which could lead the Fed to take a tougher stance—something that would typically boost the US Dollar. Instead, the market saw the tariffs as a risk to economic growth and began pulling away from the dollar.
What stands out even more is that the dollar’s long-standing “safe haven” status is now being questioned. Normally, when equity markets fall sharply, we would expect the dollar to strengthen. But on the days the tariffs were announced, major US indices dropped nearly 5%, and the dollar did not rise.
Deutsche Bank described this as a sign of “growing institutional distrust of the US,” while National Australia Bank said the dollar no longer builds confidence as a reserve currency, even during crises.
Stuck Between Heat and Slowdown
The economic impact of tariffs is creating a difficult balance. They push prices up by making imports more expensive, while also slowing down the economy by reducing consumer spending and business investment. Tariffs on China have reached up to 54%, and other countries like the EU and Vietnam are also facing strict measures. All imports now face at least a 10% tariff.
According to the Tax Foundation, these policies could cost US households an extra $1,900 to $4,700 per year. Incomes are expected to drop by 1.9%, and corporate profits in the S&P 500 may fall by 2% to 3%. Growth projections have been lowered from 2.3% to 1.8%. As a result, markets are now anticipating interest rate cuts from the Fed, which is adding more pressure on the dollar.
In the first quarter of 2025, foreign investors pulled $42 billion out of US bonds—the largest capital outflow since 2022. At the same time, US exports worth $330 billion are under pressure due to retaliatory tariffs.
IMF data shows a shift in global reserves: central banks are increasing their holdings of euros and yuan, while the dollar’s share as a reserve currency is declining. From 59% at the end of 2024, it is expected to fall below 55% by 2030. Deutsche Bank (ETR:DBKGn) describes this trend as a weakening of the dollar’s role as a “store of value.”
Deeper Impacts from 2018 Tariffs
These developments echo the trade wars Trump initiated during his first term between 2018 and 2020. However, the current tariffs are broader in scope. Back then, the average tariff rate rose from 3.4% to 19.3%; this time, it has increased from 2.5% to 16.5%.
In 2018, the DXY dropped by 4.1%. Now, the decline has deepened to 6%. Foreign direct investment has also fallen by 12%. Analysts at JPMorgan (JPM) noted that the new tariffs appear unplanned and scattered across sectors, adding to overall uncertainty.
Trump’s main aim with the tariffs is to bring manufacturing back to the US. But under current economic conditions, this goal appears unrealistic. Hourly wages in US manufacturing average $28.50—four times higher than in Mexico. On top of that, building new capacity in key sectors like semiconductors and batteries could take 3 to 5 years.
Even Canada’s auto tariffs have disrupted $4 billion worth of exports from Michigan. Meanwhile, the impact on emerging market currencies is mixed. The CNY/USD is losing value, but pressure on the USD/MXN and USD/TRY is easing. This divergence makes it even harder for the Fed to maintain price stability.
In the market’s base-case scenario—assigned a 60% probability—the DXY is expected to stay within the 99–103 range through 2025 and then gradually decline to the 92–95 range by 2027.
Key upside risks include geopolitical crises, a resurgence in inflation, and a more hawkish Fed. On the downside, the main threats are new retaliatory tariffs, a potential recession, and growing concerns over US fiscal deficits.
Technical Outlook
After last month’s sharp drop, DXY tried to stabilize around the 0.618 Fibonacci retracement level at 104. But during a period of uncertainty, the dollar struggled to regain strength. With the announcement of broad tariffs in April, it lost further ground—breaking below the 104 support level against a basket of six major currencies.
After falling to 101.27 last week, DXY managed to stay above its second key support at 102.36, which corresponds to the 0.786 Fibonacci retracement level, thanks to some reaction buying. However, the structure remains technically fragile. If daily closes drop below this level, the index could slide toward its psychological support at 100.
Such a move would likely accelerate the decline, as suggested by short-term moving averages and momentum indicators. In that case, the index may complete its current cycle by retreating toward the Fibonacci expansion zone in the 94–97 range.
On the other hand, if the Fed maintains that inflation risks outweigh recession concerns and takes a more hawkish stance, this could support a rebound in the dollar. In that case, DXY may find support around the 102 level and start to move upward. Under this scenario, the 104–105 range would likely serve as a key resistance zone during any recovery attempt.
A New Era for the US Dollar
Trump’s new tariffs are likely to shift the core dynamics that have traditionally shaped the dollar. Since the announcement, markets have started to pay less attention to usual drivers like inflation, interest rates, or trade balances. Instead, the focus has turned to broader issues—such as growth prospects, corporate confidence, and the US’s global economic position.
At a time when the dollar’s safe-haven status is being questioned, its long-term upward trend is facing significant pressure. In today’s environment, investors appear to be weighing political risks more heavily alongside traditional macroeconomic concerns.
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