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The US dollar fell last week due to Trump's inconsistent trade policies and signs of a slowing economy.
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February's non-farm payroll data disappointed, with unemployment rising, increasing the chances of Fed rate cuts.
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The euro and yen strengthened as investors moved to safer assets amid US economic uncertainty.
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The US dollar has been losing value since the start of the year, and the decline picked up speed last week. Uncertainty in the Trump administration's trade policies and signs of a slowing US economy have added to investor concerns.
The greenback dropped over 3% last week to 103.45, its lowest level in four months. This decline is driven by concerns over US trade policies and a weakening job market.
Trump's Trade Policies Stir Markets
Trump's trade policies continue to create uncertainty in the markets. Last week, he announced tariffs of up to 25% on imports from Mexico, Canada, and China, only to suspend them temporarily. This unpredictability has raised market risks and led to dollar outflows.
The lack of consistency in Trump's policies has shaken investor confidence, making pricing more difficult and weakening trust in the dollar. As a result, investors are moving faster toward the USD/CHF and USD/JPY as safer alternatives.
Signs of a Weakening Labor Market
February's Non-farm employment data pointed to a slowdown in the labor market. Payrolls rose by 151K, falling short of the 160K forecast. The unemployment rate increased from 4% to 4.1%, while Average Hourly Earnings grew by 0.3%, below the expected 0.4%.
These figures suggest a weakening in the US economy, with slow wage growth potentially hurting consumer spending and pushing inflation lower. Citi strategists believe this gives Fed enough reason to keep interest rates unchanged in March. However, rising unemployment and sluggish wages make future rate cuts more likely.
Euro and Japanese Yen Also Strengthen
Concerns about a slowing US economy and uncertainty around Trump's policies are driving up the value of the euro and yen. The euro gained further after Germany announced a €500 billion boost for defense and infrastructure. ECB Governing Council Member Isabel Schnabel noted disagreements over an April rate cut and warned that increased defense spending could push inflation higher.
The Japanese yen is also strengthening as investors seek safer assets, reaching a five-month high against the dollar. Market uncertainty over Trump's trade policies and the US economic slowdown is accelerating this shift.
Eyes on This Week's Inflation Data Ahead of Fed Decision
Fed Chairman Jerome Powell said economic uncertainties have increased, but the 2% inflation target remains unchanged. He reiterated that the Fed is in no rush to cut rates and will closely monitor economic data. However, weak job growth and slowing wages could push the Fed toward another rate cut.
This week's US inflation data will be key for the market. Core CPI is expected at 3.2%, while CPI is projected at 2.9%. If the data meets expectations, the market reaction may be neutral, but any surprises could increase volatility.
Concerns over a slowing US economy and Trump's unpredictable trade policies are keeping pressure on the dollar. Weak job growth, policy uncertainty, and the potential for a Fed rate cut may weigh on the dollar in the short term, though stronger-than-expected inflation data could trigger a brief rebound.
Technical Outlook on DXY
After rising in the last quarter of 2024, the DXY entered a correction phase in early 2025. The decline accelerated last week, keeping the index below its key support level at 104.
Based on the recent uptrend, 104 aligns with the critical Fib 0.618 correction level. Holding above this level would suggest a healthy correction, but if it breaks lower, the decline could extend toward Fib 0.786 at 102.37.
Weaker-than-expected inflation data or further signs of slowing inflation could push the DXY higher, potentially lifting it above 104 before the Fed's decision next week. If the index rebounds, 105.22 and 106.4 are key short-term resistance levels.
However, the downward break in short-term exponential moving averages and a bearish Stochastic RSI signal continued to put pressure on the dollar. Daily closes above 104 are now crucial for any recovery.
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