Trump Trade War: How Tariff Instability Impacts the US Dollar, Bonds, and Equities

The US Court of Appeals ruling against Trump’s tariff authority introduces fresh instability into trade policy. Investors now face greater legal and political uncertainty as the case advances to the Supreme Court. At the same time, growth momentum remains fragile, as evidenced by the slower underlying activity revealed in the first-half 2025 GDP data.

On the other hand, core PCE inflation increased to 2.9%, reflecting the effects of tariffs and elevated service costs.

These factors have added another layer of bearish pressure on the US Dollar Index, complicating the US Treasury market and placing equities in a delicate balance between liquidity support and trade risks. Meanwhile, the Chicago Fed National Financial Conditions Index fell to -0.56, signalling strong liquidity in the financial system.

Additionally, the Fed continues to maintain commercial bank reserves above $3.2 trillion to support market stability.

Treasury Yields Caught Between Inflation Risks and Fed Expectations

Tariffs increase costs for consumers and businesses, making them inherently inflationary. The bond market reflects this tension, with 10-year yields testing the 4.2% support level.

While markets expect the Fed to cut rates in September, structural deficits and tariff-driven inflation could limit any long-term relief. Investors face the risk that long-term yields resume their upward trend even if the Fed lowers short-term rates. This would repeat the pattern seen after the 2024 rate cuts.

The technical outlook for the 10-year US Treasury note yield shows a substantial consolidation over the past 12 months. This range-bound movement remains confined between 4.00% and 4.70%. A break below 4.00% could trigger a sharp decline in yields, while a breakout above 4.70% would likely open the path toward the 5.00% region.

Despite these consolidation, a significant move is likely to emerge in the coming weeks. Meanwhile, the 50-day SMA remains below the 200-day SMA. The RSI also continues to hold below the 50 level, indicating persistent short-term downside pressure in U.S. Treasury yields.

US Equities Hold Gains Amid Recession Signals and Trade Tensions

The Dow Jones 30 and S&P 500 continue to attract buyers due to strong liquidity. However, consumer sentiment remains at recession levels, and retaliatory tariffs from Brazil, India, and Mexico highlight rising global risks.

The chart below shows a steep decline in the Conference Board’s Leading Economic Index, signaling broad economic weakness.

If trade frictions escalate, corporate earnings could come under pressure despite supportive financial conditions. The recent resilience in equities may prove temporary if the economic slowdown deepens with persistent inflation.

Dow Jones Points to Breakout Momentum

The bullish momentum in the Dow Jones 30 is evident on the weekly chart, which shows the formation of a broadening wedge pattern following an inverted head-and-shoulders breakout. The breakout from the 35,000 level in 2023 triggered a strong rally, pushing the index to a record high in November 2024.

The record high of November 2024 was broken in 2025, when the index reached 45,000 and continued its upward surge. The strong support formed in April 2025, and the subsequent breakout above the 45,000 region in August suggests the Dow Jones is likely to continue higher toward the 50,000 level in the coming weeks.

S&P 500 Maintains Bullish Channel

The daily chart for the S&P 500 indicates that the index is currently trading within an ascending channel, following a breakout from an inverted head and shoulders pattern. This pattern, formed with the head at 4,835 and shoulders near the 5,246 and 5,800 levels, signals strong bullish momentum.

The index has recently found strong support around the 6,400 level, which aligns with the lower boundary of the ascending channel. This support is likely to trigger a move toward the 6,600-6,700 zone.

US Dollar Index Nears Breakdown as 96 Support Faces Critical Test

The technical outlook for the US Dollar Index remains strongly bearish, as the index approaches the critical support zone around the 96 level. This zone aligns with the lower boundary of a long-term ascending channel, within which the index has traded for the past 14 years. A break below 96 would likely trigger a sharp decline toward the 90 level.