Investors Bet on Stronger Dollar

The U.S. Dollar Index (DXY) is down 0.51% this week to 99.58 points, while the EURUSD pair is trading flat around 1.1350, consolidating last week’s sharp gains. The Euro surged 4.6% to 1.1473—its highest level since February 2022—largely driven not by macroeconomic fundamentals, but by the intensifying trade standoff between the United States and China.

The initial boost for the Euro came on April 3, following President Donald Trump’s announcement of reciprocal tariffs targeting imports from 185 countries. In response, the EURUSD spiked 2.8% to 1.1146 during Asian trading, before retracing to 1.0890. A renewed rally followed when China dismissed U.S. demands to withdraw its retaliatory 34% tariffs. As Trump escalated the situation with a 104% tariff on Chinese goods, the Euro added another 1.1% to reach 1.1089. China countered with an 84% tariff, prompting Trump to raise U.S. tariffs to a staggering 145%, fueling another 4.7% surge in the EURUSD over the next several days.

However, with both nations now locked in a high-stakes stalemate, the potential for further tariff escalation appears limited. Neither side holds a clear upper hand. The U.S. cannot quickly replace Chinese imports, and the burden of the 145% tariff is expected to feed into stagflationary pressures over the next two years. Conversely, any further retaliatory move from China—whether overt or through silence—could trigger the country’s first recession in five decades. Yet, political resolve remains stronger in Beijing, while President Trump faces mounting criticism from U.S. business leaders, whose companies have reportedly suffered trillions in market cap losses.

Despite speculation about the Bank of Japan selling U.S. Treasuries, most analysts point to China as the likely force behind the recent bond market stress. Some suggest there may even be coordinated action between China and Japan.

Institutional investors seemed to anticipate the Dollar’s decline. Over a two-week span in March and early April, they sold $67.3 million of the WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU). However, last week saw a reversal, with the fund reporting $14.6 million in net inflows, as investors took profits on the Euro and rotated back into the Dollar. The trade war now appears to be cooling, especially after the U.S. lowered tariffs on Chinese electronics to 20%, signaling a temporary pause. Markets are now watching to see whether Beijing will reciprocate.

Macroeconomic data is likely to play a secondary role in shaping near-term currency trends. U.S. retail sales for March, due Wednesday, are expected to show solid growth, which would support the Greenback. That same day, Federal Reserve Chair Jerome Powell will speak at the Economic Club of Chicago, followed by a European Central Bank (ECB) meeting on Thursday, where a quarter-point rate cut is widely expected.

Technically, the EURUSD has exhausted most of its immediate upside potential and remains in extreme overbought territory. A breakdown below the 1.1320–1.1340 support zone could trigger a reversal, with intermediate targets at 1.1100–1.1150 and a broader downside range between 1.0600–1.0700.