USD Outlook: Yield spreads are back in control, with the US dollar index headed towards the 99.177–99.838 range
2025-07-30 00:21:12
On Tuesday (July 29), the US dollar index (DXY) rose sharply, breaking through the key resistance level of 98.300, the 50-day moving average, which has now become immediate support.
The breakout confirms a short-term trend reversal, targeting the key retracement range between 99.177 and 99.838. With the US dollar index climbing above 98.950, the June 23 high of 99.421 and the May 29 peak of 100.540 now serve as potential upside targets.
US-EU tariff deal boosts dollar; dollar rebounds against euro
The dollar's strength intensified after a trade deal was reached with the European Union over the weekend, which included a 15% increase in U.S. tariffs while the bloc pledged to increase spending on U.S. energy and defense. The deal helped the dollar post its best session against the euro since May, underscoring market confidence in the U.S.'s ability to manage tariff risks without sparking damaging retaliation.
The euro fell more than 1% on Monday as traders weighed the pros and cons of European concessions. The dollar strengthened broadly despite similar trade deals with Japan and the UK covering 60% of total US trade - a sign that the risk premium that had been driving up trade war fears since April and had been weighing on the greenback is fading across the board.
The Fed is in the spotlight, but no interest rate changes are expected in the near term
The dollar's gains came as the Federal Reserve began its two-day policy meeting, with no policy changes expected this week.
However, traders are closely watching upcoming labor market data and the June goods trade report, both of which will inform second-quarter GDP data due later this week.
U.S. Treasury yields remain elevated amid forecasts of $1.007 trillion in borrowing in the third quarter and rising crude oil prices, while volatility in both stock and bond markets has fallen to yearly lows.
The dollar is starting to follow yields again, a bullish sign
Perhaps the most telling sign is the reconnection between the dollar and the yield differential. Since April, the gap between the two-year U.S. and German yields has widened by more than 20 basis points, but the dollar had previously lagged. That disconnect is now being corrected, with the dollar index surging 1% on Monday as the interest rate differential reasserts its influence.
The trade component of the Baker-Blum-Davis Economic Policy Uncertainty Index, a measure of investor concerns, also fell to its lowest level since January - a sign that tariff-induced pressures are easing.
Market Outlook: The bullish trend of the US dollar index intensifies in the key retracement range
(Source of US Dollar Index daily chart: Yihuitong)
As risk premiums fade and trade tensions ease with a deal, the dollar is becoming sensitive again to interest rate differentials and fundamentals.
The USD Index's breakout above 98.950 has activated the next target range between 99.177 and 99.838. A sustained close above 99.421 could pave the way for a test of 100.540. Until the Federal Reserve takes a dovish turn, the USD's bullish logic remains valid.
At 00:18 Beijing time, the US dollar index was 98.9305/96, up 0.27%.
The breakout confirms a short-term trend reversal, targeting the key retracement range between 99.177 and 99.838. With the US dollar index climbing above 98.950, the June 23 high of 99.421 and the May 29 peak of 100.540 now serve as potential upside targets.
US-EU tariff deal boosts dollar; dollar rebounds against euro
The dollar's strength intensified after a trade deal was reached with the European Union over the weekend, which included a 15% increase in U.S. tariffs while the bloc pledged to increase spending on U.S. energy and defense. The deal helped the dollar post its best session against the euro since May, underscoring market confidence in the U.S.'s ability to manage tariff risks without sparking damaging retaliation.
The euro fell more than 1% on Monday as traders weighed the pros and cons of European concessions. The dollar strengthened broadly despite similar trade deals with Japan and the UK covering 60% of total US trade - a sign that the risk premium that had been driving up trade war fears since April and had been weighing on the greenback is fading across the board.
The Fed is in the spotlight, but no interest rate changes are expected in the near term
The dollar's gains came as the Federal Reserve began its two-day policy meeting, with no policy changes expected this week.
However, traders are closely watching upcoming labor market data and the June goods trade report, both of which will inform second-quarter GDP data due later this week.
U.S. Treasury yields remain elevated amid forecasts of $1.007 trillion in borrowing in the third quarter and rising crude oil prices, while volatility in both stock and bond markets has fallen to yearly lows.
The dollar is starting to follow yields again, a bullish sign
Perhaps the most telling sign is the reconnection between the dollar and the yield differential. Since April, the gap between the two-year U.S. and German yields has widened by more than 20 basis points, but the dollar had previously lagged. That disconnect is now being corrected, with the dollar index surging 1% on Monday as the interest rate differential reasserts its influence.
The trade component of the Baker-Blum-Davis Economic Policy Uncertainty Index, a measure of investor concerns, also fell to its lowest level since January - a sign that tariff-induced pressures are easing.
Market Outlook: The bullish trend of the US dollar index intensifies in the key retracement range
(Source of US Dollar Index daily chart: Yihuitong)
As risk premiums fade and trade tensions ease with a deal, the dollar is becoming sensitive again to interest rate differentials and fundamentals.
The USD Index's breakout above 98.950 has activated the next target range between 99.177 and 99.838. A sustained close above 99.421 could pave the way for a test of 100.540. Until the Federal Reserve takes a dovish turn, the USD's bullish logic remains valid.
At 00:18 Beijing time, the US dollar index was 98.9305/96, up 0.27%.
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