Dollar Outlook: Yield spreads return to dominance, with the dollar index looking towards the range of 99.177 - 99.838

On Tuesday (July 29), the Dollar Index (DXY) rose sharply, breaking through the key resistance level of the 50-day moving average of 98.300, which has now become instant support.

The breakout confirms a short-term trend reversal, targeting the key retracement range between 99.177 and 99.838. With the dollar index climbing above 98.950, the June 23 high of 99.421 and the May 29 peak of 100.540 are now potential upside targets.

US-EU tariff deal boosts dollar; dollar rebounds against euro

The dollar's strength intensified after the weekend's trade deal with the European Union, which included a 15 per cent increase in US tariffs and European Union pledges to increase spending on US energy and defence. The deal helped the dollar record its best performance against the euro since May, underlining confidence in the US ability to manage the risk of tariffs without provoking damaging retaliation.

The euro fell more than 1 per cent on Monday as traders weighed the merits of European concessions. Despite similar trade deals with Japan and the UK covering 60 per cent of total US trade, the dollar has strengthened across the board - a sign that the risk premium driven up since April by trade war fears, which had weighed on the greenback, is fading across the board.

The Federal Reserve is in the spotlight, but it is not expected to adjust interest rates anytime soon

The dollar's rise comes as the Federal Reserve begins its two-day policy meeting, with no policy changes expected this week.

However, traders are closely monitoring upcoming labor market data and the June goods trade report, both of which will inform second-quarter GDP data later this week.hycmforeign exchange

With borrowing estimates of $1.007 trillion in the third quarter and higher crude oil prices, Treasury yields remain high, while volatility in both equity and bond markets has fallen to annual lows.

The dollar is starting to follow the yield trend again, which is a bullish signal

Perhaps the most striking signal is the recorrelation between the dollar and yield spreads. The two-year spread between the US and Germany has widened by more than 20 basis points since April, but the dollar has lagged. Now that disconnect is being corrected, with the dollar index surging 1 per cent on Monday as interest rate differentials regained their influence.

The trade component of the Baker-Bloom-Davies Economic Policy Uncertainty Index, a measure of investor concern, also fell to its lowest level since January - a sign that tariff-related pressures are easing.

Market Outlook: Dollar Index bullish trend intensifies in key retracement range

(Dollar index daily chart, source: Internet)

As the risk premium recedes and trade tensions are eased through a deal, the dollar is re-sensitive to interest rate differentials and fundamentals.

After the dollar index broke through 98.950, it activated the next target range between 99.177 and 99.838. A sustained close above 99.421 could set the stage for a test of 100.540. Until the Fed turns dovish, the bullish logic for the dollar still holds true.

At 00:18 Beijing time, the US dollar index was trading at 98.9305/96, an increase of 0.27%.