The Trump Trade: US Dollar Slides as EUR/USD Breaks Out Amid Rising Trade Tensions

Trump’s Tariffs Raise Pressure on China

President Trump’s 34% reciprocal tariff on Chinese goods triggered immediate market volatility. However, the US suspended this tariff for 90 days; the effective rate on Chinese imports still stands at 31.8%, the highest among US trade partners.

The chart below shows that China is imposed with the highest tariff rate, with most of the increases added in 2025. Japan, Indonesia, and Turkey follow with comparatively lower rates. This aggressive trade stance has raised investor uncertainty and limited global risk appetite. The US dollar remains under bearish pressure despite the strong rally in May due to the oversold market conditions.

The US dollar struggles to maintain strength due to doubts about long-term trade stability. Moreover, the national security probe into semiconductor imports adds further complexity. These actions signal tighter trade restrictions, which could slow global trade and affect US economic growth. As a result, major currency pairs like USD/JPY, EUR/USD, and GBP/USD show increased volatility.

Major companies are moving production out of China. Apple plans to shift iPhone output to India, while VTech will relocate all US-bound production by next year. These changes hint at a long-term decoupling of US-China trade. This structural shift may weaken the dollar over time if it leads to supply chain inefficiencies and higher import costs.

Tariffs Deepen Fiscal Strain and Weaken US Economic Outlook

The US economy faces growing pressure from rising tariffs and unsustainable debt. The federal debt now exceeds $37 trillion. Moody’s recently downgraded the US credit rating from Aaa to Aa1, citing widening deficits. The agency expects federal deficits to reach 9% of GDP by 2035, up from 6.4% in 2024.

This fiscal path is alarming. The Congressional Budget Office (CBO) projects public debt will surge to 172% of GDP by 2054. These estimates assume 10-year Treasury yields will fall below 4.0% by 2026, which now looks unrealistic. Yields have already tested 4.5%, and markets are pricing a breakout to 5.0%. Traders and global creditors are watching closely, especially after the Treasury’s rapid response to rising yields in April. China could leverage this vulnerability in ongoing trade negotiations.

The chart below shows that real retail sales have remained flat for the past three years. A decline from this level may develop due to tariff-driven inflation, spending cuts, and tax hikes, which could reduce consumer demand. As consumption slows, economic growth and investor confidence may weaken. Consequently, the US dollar could face continued downside pressure in global forex markets. However, this drop in the US dollar may benefit the gold (XAU) due to the strong safe-haven flows.

Moreover, the drop in US consumer sentiment indicates lower confidence in the economy, which weakens the US dollar.

US Dollar Index Struggles Near 100 as Momentum Remains Bearish

The monthly chart for the US Dollar Index shows that it remains within an ascending channel. The index has faced bearish pressure since breaking below the 100.65 level. A rebound from the 98 level reached resistance at 102, then continued lower. A break below the 96 level could trigger a move toward the key support at 90.

EUR/USD Surges After Falling Wedge Breakout Signals Trend Reversal

The strong bearish pressure in the US Dollar Index has broken the long-term pivot in EUR/USD at $1.12. The breakout above $1.12 has triggered a strong move toward the $1.22 level. This move is significant as it followed the formation of a falling wedge pattern. The falling wedge is a bullish reversal pattern that signals upward pressure. Additionally, the RSI remains above the midline, confirming continued bullish momentum.

The short-term chart for EUR/USD also shows strong bullish momentum. The emergence of a cup pattern during Q1 2025 and the breakout above $1.05 triggered a strong move toward the $1.16 level. After a brief correction, the price returned to the breakout level at $1.12 and touched the 50-day SMA. The price rebounds higher, indicating a potential move toward the $1.22 target.

Despite the breakout in EUR/USD, USD/JPY failed to break below the long-term pivotal level at 140. If the US Dollar Index breaks below the 98 level, USD/JPY could drop through the key support at 140.