US Dollar sees slight Friday downfall as buyer momentum dwindles
- DXY Index demonstrates slight losses yet sustains near early November highs.
- The downward movements may be seen as buyers running out of momentum.
- Hawkish bets on the Fed and a sour market mood may limit the losses.
The US Dollar Index (DXY) is currently trading at 106.09, a mild loss from its recent peak of 106.35. Despite this, the index remains geared toward testing its November 1 high of 107.10. However, the outlook for the Greenback remains positive as Middle East tensions and hawkish bets on the Federal Reserve (Fed) may drive demand back to the USD.
The US economy exhibits robust growth with persistent inflation, which made the Fed change its messaging to a more hawkish one, triggering a rally of US Treasury yields and hence benefiting the US Dollar.
Daily digest market movers: DXY slightly corrects, while outlook remains positive
- Higher Middle East tensions cultivate risk-off sentiment, affecting global markets.
- Fundamentals and hawkish Federal Reserve (Fed) rhetoric ensure the US Dollar's uptrend continues.
- For the next Fed meeting, signs show some officials considering rate hikes, a major departure from the previous intentions of rate cuts. This could significantly impact markets if market pricing realigns itself to this new direction.
- In the US Treasury bond market, the 2-year, 5-year, and 10-year bond yields are all falling. Specifically, the 2-year yield trades at 4.97%, the 5-year at 4.65%, and the 10-year at 4.60%, but all remain near multi-month highs.
- The first rate cut is now expected to hurdle past the May, June, and July meetings to appear in September.
DXY technical analysis: DXY showing bearish momentum, but bulls are still in the game
On the daily chart, The Relative Strength Index (RSI) operates in positive territory but exhibits a negative slope, implying that a move down is possible and reflects bearish momentum. Concurrently, the Moving Average Convergence Divergence (MACD) underscores this sentiment as the decreasing green bars suggest an imminent bearish crossover, highlighting ongoing selling momentum.
However, despite short-term downward pressures, the bulls have not yet thrown in the towel. This is substantiated by the DXY's position above the 20, 100, and 200-day Simple Moving Averages (SMAs), which indicates that bulls still have control over the overall trend.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.