The U.S. dollar slipped lower at the start of the week. This drop was driven by ongoing worries about the U.S. deficit and renewed trade tensions with the European Union (EU). This happened even though President Donald Trump stepped back from his plan to impose a 50% tariff on EU goods.
According to ING, the market had mostly moved past tariff fears seen in April and was hopeful for new trade deals in the coming months. However, the recent conflict with the EU has revived those concerns.
ING noted, “If there’s a lesson from April, it’s that the dollar bears the brunt of tariff drama.”
Their analysts also pointed out that short-term valuation models show the dollar is still undervalued by about 4% against the euro, pound, and Canadian dollar, and by 3% against the yen and Australian dollar.
Despite this, these models are less reliable now because the dollar is not moving as expected based on usual economic factors. ING said the dollar is acting more like an emerging market currency due to investor worries about fiscal health and unpredictable policies.
A key sign of this unusual behavior is the breakdown in the usual link between bond yields and the dollar. The correlation between 10-year Treasury yields and the U.S. Dollar Index was 0.68 at the start of the year but has now dropped to zero.
Investors are now focused on important U.S. economic data coming this week. Tuesday’s Consumer Confidence index is expected to improve to about 87. However, ING warns the dollar might need a reading above 90 to ease growth concerns.
Other data to watch include April durable goods orders, personal income, inflation figures, and the latest Federal Reserve meeting minutes. These could give clearer signals on the dollar’s direction.
With markets quiet on Monday due to U.S. and U.K. holidays, ING expects more clarity as trading picks up.
The bank’s outlook remains cautious. They see more risks to the downside for the dollar because of deficit worries and trade uncertainty. Without strong economic surprises, ING believes the dollar index (DXY) is more likely to fall back to April’s low near 98.0 than to rise to 100.0 soon.
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