At the time of writing on Monday, the US Dollar Index (DXY), which measures the USD against six major currencies, has declined to Friday’s low of 99.62. This drop is largely due to the significant surge of the Taiwan Dollar (TWD) by over 5%, causing a ripple effect on other Asian currencies against the USD. According to Bloomberg, this is the largest intraday gain for the TWD in over three decades, as there is speculation that exporters are quickly converting their USD holdings to the TWD. This sudden shift in the market is occurring during a period of low liquidity, with several Asian countries like China and the UK closed for a public holiday.
This event adds an interesting dynamic to the ongoing tariff negotiations between the US and Taiwan. It is believed that exporters are purchasing TWD in anticipation of the currency appreciating, which would help in reaching a favorable trade deal with the US. Over the weekend, Taiwan’s government announced that its negotiation team had held its first meeting with the US on May 1, but no details were disclosed.
The impact of the TWD surge has extended beyond just the currency itself. The US Dollar Index is also being affected, even though the TWD is not one of the currencies included in the index. Other Asian currencies, like the Japanese Yen (JPY), are also following suit. The JPY, which makes up 13.6% of the DXY, is now nearly 1% stronger against the USD. This is a result of the demands made by the Trump administration for exporting countries to appreciate their currencies, as a condition to avoid tariffs. This further weakens the USD, and this effect is only from Taiwan.
Looking at the technical analysis, the first resistance level for the DXY is at 100.22. In September 2024, this level provided support for the DXY. Breaking above the psychological level of 100.00 would signal a bullish trend. A strong recovery could see the DXY reach 101.90, which was a crucial level throughout December 2023, and also served as a base for the inverted head-and-shoulders (H&S) formation in the summer of 2024.
On the other hand, a significant bearish headline could quickly test the support level of 97.73. Dropping below this level would lead to the next support at 96.94, which is relatively thin. Beyond that, the DXY could reach lower levels at 95.25 and 94.56, both of which would be fresh lows not seen since 2022.
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