Dollar Index Crash: Our Cyclical Analysis
The Weight of Trump's Tariffs and Our Cyclical Analysis
April 3, 2025 – The Dollar Index is experiencing a sharp decline, dropping nearly 3% in just two sessions. This downturn has been triggered by the announcement of new tariffs imposed by President Donald Trump.
Since late 2024, our cyclical model had been pointing to a weakening phase for the dollar. It is a statistical reading, not a certainty: models describe probabilities, and markets can always behave differently.
The image overlays the Dollar Index with the cyclical projection (in yellow) calculated in August 2024 with our statistical models. A projection describes the behaviour expected by a model; it is not a forecast of what the market will do.
Markets remain uncertain and subject to surprises: a data-driven, probability-based view helps to frame scenarios, not to predict them.
The Mistake of Many Analysts
Many analysts in recent months had been forecasting a stronger dollar due to tariffs and the Fed’s slow pace in cutting interest rates, even theorizing that EURUSD could fall below parity. These analysts were misled by the neoclassical economic theory, which assumes that the imposition of tariffs should strengthen the domestic currency in the short term.
Here's how the neoclassical reasoning goes:
Tariffs reduce imports
Fewer imports = fewer dollars flowing out of the country
Reduced demand for foreign currencies by Americans
Resulting in relatively higher demand for dollars, which should strengthen the currency
However, as we know, economics is not an exact science, and the reality of an open market economy is far more complex than textbook theories. In the modern economic landscape, this mechanism must also account for many other factors, including:
Investors’ expectations about the negative impact of tariffs on economic growth
Monetary policies adopted in response to trade tensions
Trade retaliations from other countries
Where the Cycle Stands Now
The current cycle remains downward-oriented, and for now, there are no signs of a possible trend reversal. The high volatility in the markets clearly demands close monitoring of the situation, ready to promptly detect any potential signals of change.
The focus should now be on the upcoming support levels distributed between the 100.8 and 99.6 area.
We will continue to monitor the situation week by week through our exclusive analyses for subscribers.
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