The U.S. dollar soared on Monday following the announcement of a trade deal between China and the U.S., raising optimism that a prolonged trade war could be avoided.
By 03:30 ET (08:30 GMT), the Dollar Index, which tracks the U.S. dollar against six other major currencies, jumped 1.3% to 101.455, marking a one-month high.
However, the index remains over 3% lower since President Trump’s “Liberation Day” announcement on April 2.
Trade Deal Details
The White House confirmed on Sunday that a deal had been reached after U.S. officials held weekend talks with their Chinese counterparts in Geneva. Both sides agreed to pause the rising tariffs for 90 days, and the U.S. will reduce tariffs on Chinese goods to 30%, while China will lower duties on U.S. imports to 10%. This comes after President Trump raised tariffs on China to as high as 145%, prompting China to retaliate with tariffs of 125% on U.S. goods.
Further negotiations are planned, with both countries expected to hold working-level discussions on economic and trade matters.
Dollar Recovery and Economic Outlook
Analysts at ING noted that positive news about trade de-escalation is crucial for the dollar’s recovery. While the dollar’s rise has not matched stock market gains, Trump’s shift toward a more pragmatic trade stance has helped reduce risks for the U.S. currency.
This week, attention is expected to turn to the release of the U.S. Consumer Price Index on Tuesday. Investors will closely watch for signs of how the trade conflict has affected the economy, particularly as the U.S. Federal Reserve weighs potential rate cuts. Currently, markets are pricing in a 17% chance of a rate cut in June, and a 59% chance for July.
Euro’s Struggles
The euro fell 1.2% to 1.1109 against the dollar following the trade deal news. ING analysts suggested that the euro might face further declines, noting that it remains 3% overvalued, largely due to interest rate differences between the U.S. and the Eurozone.
The European Central Bank has cut rates seven times in the past year, and another rate cut is expected in early June. Markets are pricing in a 90% chance of a rate cut next month, while expectations for a U.S. Fed rate cut are lower.
Global Markets and Geopolitical Tensions
Traders are also watching developments in Ukraine. Ukrainian President Volodymyr Zelenskiy has expressed willingness to meet Russian President Vladimir Putin in Turkey for talks, which could impact the EUR/USD exchange rate, depending on the outcome of any peace negotiations.
Pound and Yen Movements
The British pound fell 1% to 1.3180 against the dollar, although it held up better than the euro following the announcement of a U.S.-U.K. trade deal last week.
In Asia, the Japanese yen weakened, with USD/JPY rising 1.8% to 147.92. The yen, often seen as a safe-haven currency, was hit by the positive news surrounding U.S.-China trade talks.
Meanwhile, the Chinese yuan saw a slight drop, with USD/CNY down 0.3% to 7.2143. The yuan benefitted from the easing trade tensions, although China continues to face economic challenges, including ongoing inflationary pressures. April data showed a third consecutive month of declining consumer prices and a sharp drop in factory-gate prices.
Overall, the trade deal between the U.S. and China has sparked optimism in global markets, helping to strengthen the U.S. dollar and ease some concerns over the ongoing trade dispute.
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