**U.S.-China Tariff Truce Injects Fresh Momentum into the Dollar**

The U.S. and China reached a 90-day pause on new tariffs on Monday (May 12), signaling a rare moment of de-escalation in years of trade tension. The agreement sparked a clear shift in market sentiment, driving the U.S. Dollar Index (DXY) up 1.29% to 101.63—marking its largest single-day gain in nearly a month. Investors appear more willing to embrace risk, pushing capital back into both the dollar and risk assets, hinting at a possible rerouting of global capital flows.

The truce was struck during bilateral talks in Geneva, where the U.S. agreed to cut punitive tariffs on Chinese goods from 145% to 30%, while China lowered its tariffs on U.S. imports to 10%. While the deal doesn’t touch on more contentious issues like tech export controls or industrial subsidies, the mutual show of goodwill is strategically significant—it opens the door for more meaningful negotiations in the future.

Markets responded swiftly. The offshore yuan climbed to a six-month high against the dollar at 7.2001. Hong Kong’s Hang Seng Index rallied over 3%, and major European markets closed up around 1% or more. In commodities, Brent crude rose 3.18% to $65.94 per barrel, reflecting growing optimism around global trade recovery.

In forex, the dollar strengthened 1.7% against the yen to 147.84, and 1.5% versus the Swiss franc to 0.8440. After months of consolidation, the dollar appears to be breaking out. Kenneth Brooks, FX strategist at Société Générale, noted, “After underperforming against equities and bonds, the dollar is now entering catch-up mode with momentum on its side.”

As confidence returns, major U.S. multinationals are extending the duration of their currency hedging contracts—some up to five years—suggesting belief in a potentially sustained dollar uptrend, far beyond a short-term bounce.

That said, there are cautions. Austan Goolsbee, President of the Chicago Fed, warned that while the tariff freeze may ease pressure, earlier measures could still weigh on business activity into summer. The next key test for the dollar will be this week’s April inflation and retail data. A hotter-than-expected CPI could reinforce the Fed’s hawkish stance, further supporting the dollar.

Rate markets are already adjusting. The probability of a Fed rate cut in December has dropped to 68%, down sharply from 92% a month ago. This recalibration of Fed expectations is lending further support to the dollar.

Political risks linger, however. Despite the recent bounce, the dollar index is still down over 6% year-to-date, dragged by ballooning U.S. fiscal deficits and ongoing questions around Fed independence. Former President Trump recently stated he would replace Fed Chair Jerome Powell if re-elected—a move that adds another layer of uncertainty for markets.

Meanwhile, traditional safe havens have weakened. Gold fell 3.1% to $3,223.57 per ounce, while the yield on 10-year U.S. Treasuries climbed to 4.50%. If U.S.-China talks continue progressing and a fresh wave of conflict is avoided, capital could keep rotating into the dollar and into growth-linked sectors—particularly those sensitive to trade, like autos, technology, and electronics.

Bottom line: The 90-day tariff pause provides a clear, short-term boost to market momentum. But investors should remain cautious. Watch for shifts in Fed policy signals and whether U.S.-China talks can turn goodwill into lasting progress. Unless the DXY breaks convincingly above 102.5, analysts recommend avoiding excessive chasing and instead look to position in emerging markets and cyclical sectors set to benefit from improved trade sentiment.