US Dollar trades lower following disappointing Initial Jobless Claims figures
- Higher-than-expected US Jobless Claims figures raised concerns over the US labor market.
- Markets await Nonfarm Payrolls, Unemployment Rate, and Average Hourly Earnings on Friday.
- The odds of a rate cut in June remain high.
The US Dollar Index (DXY) is mildly lower on Thursday and presently trading around 104. Mainly driven by weak weekly Initial Jobless Claims figures. The focus is set on Friday’s Nonfarm Payrolls where investors will get a clearer picture of the labor market.
The US labor market remains resilient despite the weak figures as well as the overall economy, with little signs of a slowdown. In case the economy doesn’t show conclusive evidence of cooling down, the Fed might consider delaying the start of the interest rate easing cycle.
Daily digest market movers: DXY extends losses on weal labor market figures
- Weekly unemployment claims in the US reached 221K for the week ending March 30.
- The reported claims exceeded estimates of 214K and surpassed the previous week's figure of 212K.
- Following a slowdown in the US service sector, the Federal Reserve remains cautious but isn’t ruling out three cuts in 2024.
- US Treasury bond yields show a slight rise with 2-year, 5-year and 10-year bonds standing at 4.68%, 4.34%, and 4.36%, respectively.
- Investors await key labor market reports from the US, including March’s Nonfarm Payrolls, Unemployment Rate and Average Hourly Earnings data.
- These reports will crucially impact the US Dollar as they shape expectations for the next Fed meetings.
DXY technical analysis: DXY displays mixed signals with bears’ tentative clawback
The indicators on the daily chart reflect a duel between the bulls and the bears. The Relative Strength Index (RSI) is on a negative slope but in positive territory, hinting that buying momentum is losing strength. However, it is not completely gone just yet.
The Moving Average Convergence Divergence (MACD) shows decreasing green bars, implying the potential for a bearish reversal, but it still needs to cross into negative territory for a credible sell signal.
Despite these bearish signals, the pair is comfortably placed above its 20,100 and 200-day Simple Moving Averages (SMAs), pointing out that the underlying trend remains in favor of the bulls.
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.