The US Dollar Index (DXY), which gauges the dollar’s strength against six major currencies, has shown a gradual increase after two days of decline, hovering around 97.80 during Asian trading hours on Tuesday. Traders are keenly awaiting the four-week average of US ADP employment changes later today, as well as remarks from officials at the Federal Reserve.
There could be more hurdles for the dollar, especially with foreign investors steering clear of dollar-denominated assets due to rising trade uncertainties. The Trump administration is looking into implementing new national security tariffs on six sectors following a Supreme Court decision last week that annulled some of the second-term taxes. This move falls under Section 232 of the Trade Expansion Act of 1962 and is distinct from the 15% universal tariff announced on Saturday, according to the Wall Street Journal.
In retaliation, the European Union (EU) has suggested that it might halt the ratification of trade deals with the United States. There are also uncertainties regarding how long these new tariffs will remain in effect, as Congress is unlikely to extend them past the 150-day period. Additionally, India and the United States have postponed a scheduled three-day meeting aimed at finalizing an interim trade deal as the US reassesses its broader tariff strategy.
Fed Director Christopher Waller indicated that the decision regarding a potential rate cut at the Federal Open Market Committee (FOMC) meeting in March will hinge on the labor market data released in February. Currently, the swap market assigns only a 5% chance for a 25 basis point rate cut in March.
Moving forward, the dollar might continue to face headwinds, as markets anticipate the FOMC to implement a rate cut of around 50 basis points (bps) in 2026. In contrast, the Bank of Japan (BOJ) is predicted to raise rates by another 25 bps, while the European Central Bank (ECB) is expected to maintain its current policy in 2026.
