Dollar rallies as US-China tariff truce spurs risk-on sentiment

Dollar rallies as US-China tariff truce spurs risk-on sentiment

The dollar index on May 12 surged by one percent following a joint announcement from the United States and China to temporarily reduce select tariffs for a 90-day period. The move boosted investor sentiment and prompted a selloff in US Treasuries, pushing the two-year yield up by as much as 10 basis points to 3.99 percent, as traders scaled back expectations for near-term interest rate cuts by the Federal Reserve.

The Bloomberg Dollar Spot Index posted its strongest intraday gain since April 4, rising as much as one percent. The euro depreciated by up to 1.5 percent to $1.1084, marking its weakest daily performance of the year.

Safe-haven assets underperformed in the risk-on environment—both the Japanese yen and Swiss franc lagged their G-10 peers, while spot gold declined by approximately $100 to trade near $3,229 per ounce. Spot silver also retreated, dropping 1.6 percent to around $32 per ounce.

The temporary easing of trade tensions came after both countries agreed to reduce tariffs for the next three months. US tariffs on Chinese imports, previously totaling 145 percent, will be lowered to 30 percent. In return, China will reduce its 125 percent tariffs on American goods to 10 percent, providing a window for further negotiations.

Equity markets rallied sharply in response. S&P 500 futures advanced 2.7 percent, while Nasdaq 100 futures climbed 3.7 percent. The VIX (volatility index) briefly dipped below 20 for the first time since the close on April 2. In Europe, the Euro Stoxx 50 gained 1.7 percent, led by miners, consumer products, and technology sectors. The FTSE 100 underperformed, edging up by just 0.4 percent.

Akshay Chinchalkar, Head of Research at Axis Securities, noted that the prolonged softness in the dollar—particularly since the change in US administration—may be nearing its end. According to him, the greenback’s decline appears to be bottoming out.