US Dollar Index: Negative bias builds with policy headwinds – DBS

DBS Group Research strategist Philip Wee highlights the US Dollar Index's (DXY) struggle to reach the 100 level, with European currencies reflecting the greenback's weakness more accurately when Japanese Yen (JPY) volatility is removed. Wee also points to US trade policy uncertainty and legal battles over tariffs as further challenges, as well as diminished hopes for a September Federal Reserve rate hike.

The DXY's dwindling positivity is evident, with four attempts to reclaim the 100 mark proving unsuccessful. Excluding JPY's correction of -0.36% on Tuesday, post-US-Japan interventions, European currencies – EUR (+0.19%), GBP (+0.14%), and CHF (+0.14%) – demonstrate the dollar's underlying weakness. After the recent Federal Open Market Committee (FOMC) meeting, market futures reduced the likelihood of a September Federal Reserve rate hike to 58% from 72%.

Additional headwinds for the USD stem from US trade policy uncertainties. The US Court of International Trade revealed that the Trump administration had refunded approximately $100 billion or 60% of the Liberation Day tariffs collected, following the U.S. Supreme Court's ruling against the tariffs under the International Emergency Economic Powers Act in February.

GBP/USD reaches its highest level in mid-May at approximately 1.3600 due to the U.S. Treasury's decision to double liquidity support buyback operations for longer-dated nominal coupon securities. Earlier, UK data showed that annual Consumer Price Index (CPI) inflation rose to 2.9% in July, matching estimates, while core CPI increased by 2.6% year-over-year in July compared to the expected 2.5%.

EUR/USD gains bullish momentum and trades above 1.1600 since early June. The US Dollar experiences intense bearish pressure following the U.S. Treasury's announcement of increasing liquidity support buyback operations for longer-dated nominal coupon securities. Later, investors will closely examine FOMC minutes for insights into the policy outlook.

Gold (XAU/USD) enters Wednesday's trading session with modest gains, benefiting from a weaker US Dollar and a sharp decline in long-term U.S. Treasury yields, which partially recover the previous day's losses. Bitcoin's upward trend remains constricted as the downside above $64,000 remains well-supported due to investors assessing the impact of geopolitical tensions in the Middle East.