US Dollar Index breaks below 106.50 despite risk-off sentiment due to global tariff fears

• The US Dollar Index may find support as escalating global tariff tensions drive increased risk aversion.
• The White House confirmed that President Trump signed an order to implement 20% tariffs on Chinese imports.
• The US Dollar faces downward pressure as optimism over a potential Ukraine peace deal dampens demand for safe-haven assets.

The US Dollar Index (DXY), which measures the US Dollar (USD) against six major currencies, extends its losses for the second successive session, trading around 106.30 during the European hours on Tuesday. However, the downside of the DXY may be contained as improved risk aversion, fueled by escalating global tariff tensions, supports the demand for the safe-haven Greenback.

The White House confirmed on Monday that President Trump signed an order increasing tariffs on Chinese imports to 20%, though similar measures for Mexico and Canada remain pending. Trump also reiterated that reciprocal tariffs would take effect on April 2 for nations imposing duties on US goods.

In response, Canada's Prime Minister's Office stated that the country would implement 25% retaliatory tariffs on US imports starting Tuesday if US tariffs proceed. Meanwhile, China's Commerce Ministry announced early Tuesday that it would take "necessary countermeasures" to protect its legitimate rights and interests.

Despite trade tensions, the US Dollar faces downward pressure as optimism surrounding a potential Ukraine peace deal reduces demand for safe-haven assets. European leaders have expressed support for security guarantees for Ukraine, boosting risk sentiment in global markets.

US economic data on Monday provided mixed signals. The ISM Manufacturing PMI declined to 50.3, falling short of the 50.5 forecast and down from January's 50.9. However, S&P Global's final Manufacturing PMI for February exceeded expectations at 52.7, improving from its preliminary reading.

Market participants now turn their attention to key US labor data, with the ADP employment report set for release on Wednesday and the Nonfarm Payrolls report on Friday. These figures could offer further insights into the Federal Reserve's interest rate trajectory.