- US Dollar experiences modest gains as the currency seems to have hit a ceiling after a furious rally in October.
- Ongoing economic outperformance remains a major theme underpinning higher US Treasury yields and USD strength.
- Wednesday’s Fed’s Beige Book report and Thursday’s S&P PMIs figures will be important.
The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, sees modest gains amidst profit-taking after a sustained rally. US equities are pulling back while Treasury yields and the USD continue to strengthen.
Indeed, the International Monetary Fund’s (IMF) updated growth forecasts are expected to favor the US economy, contributing to the ongoing trend of economic outperformance of the US against its peers and supporting the USD, which may trigger a more cautious stance among Federal Reserve (Fed) officials.
As for now, markets are betting on high odds of two 25 bps Fed cuts in 2024, but it will all come down to incoming data.
Daily digest market movers: US Dollar rising amid equity market decline and rising Treasury yields
- IMF’s updated growth forecasts are expected to show the US economy still outpacing most other major economies, underpinning higher Treasury yields and USD strength.
- Higher Treasury yields are attracting foreign capital inflows, providing further support to the US Dollar.
- Equity markets are tumbling with widespread profit-taking after a strong rally in 2021.
- Geopolitical concerns over the Ukraine-Russia conflict and tensions in the Middle East are adding to this risk-off environment.
- The divergence theme remains alive and well with the US economy continuing to outperform most other major economies.
DXY technical outlook: DXY surges above 200-day SMA, faces resistance
The DXY index surpassed the 200-day SMA, but waning buying momentum suggests it may struggle to establish above it. Consequently, the index may engage in lateral trading in the near term. The Relative Strength Index (RSI) remains flat within overbought territory, and the Moving Average Convergence Divergence (MACD) shows flat green bars.
Support levels lie at 103.50, 103.30 and 103.00, while resistance levels are at 103.80, 104.00 and 104.30.
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.