The U.S. Dollar Index (DXY) could face upward pressure as recent manufacturing gains may be short-lived, according to Citi's latest analysis. The ISM manufacturing index rose to 50.9 in January, marking its first expansionary reading since 2022, with new orders and production showing notable strength. However, Citi analysts express skepticism about the durability of this growth, citing potential disruptions from newly announced tariffs on Canada, Mexico, and China. "We are skeptical that this strength in manufacturing will last and data as soon as February could reflect disruptions from the imposition of tariffs," Citi notes.
The report highlights that the manufacturing sector, which exports roughly half of its goods, could be adversely affected by a stronger dollar resulting from tariff uncertainties. While the employment index also rose above 50, indicating modest job growth, Citi anticipates a 10,000 decline in manufacturing employment for January. The analysts warn that prolonged tariffs could lead to production slowdowns and employee furloughs, particularly in auto manufacturing. As the market navigates these uncertainties, the DXY's trajectory remains closely tied to evolving trade policies and their impact on U.S. manufacturing.