US Dollar Index slumps below 98.50 on trade war woes

• The US Dollar Index tumbles to 98.30 in Monday's early European session, down 0.92% on the day. 
• Trump will put pressure on tariff exemption seekers to limit China trade. 
• Fed's Powell indicated tariffs justify Fed caution for now. 

The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, falls to near 98.30, the lowest since March 2022. The heightened uncertainty around US President Donald Trump's tariffs and concerns over global economic growth amid the US-China trade war undermine the USD across the board. 

On April 2, Trump proposed "reciprocal tariffs" on dozens of nations. While his administration paused levies for some countries, Trump escalated its trade war with China. Beijing has warned its trading partners against succumbing to US pressure to restrict trade with China in exchange for exemption from Trump's reciprocal" tariffs. 

Over a week, Trump's tariffs on Chinese goods rose from 54% to 104% and now 125%, adding to previous duties levied before Trump's second term. China has retaliated by raising additional duties on all US imports to 84%. Any signs of rising trade tension between the world's two largest economies could drag the Greenback lower. 

On the other hand, the hawkish remarks from the US Federal Reserve (Fed) might cap the downside for the DXY. Fed Chair Jerome Powell said last week that escalating tariffs could fuel inflation while undermining growth, complicating the path for interest rate decisions. Powell noted, "For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance."  

Meanwhile, San Francisco Fed President Mary Daly said on Friday that while she is still comfortable with a couple of interest rate reductions this year, rising risks of inflation mean the Fed may need to do less, especially given the uncertainty over Trump's trade policy.