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- US Dollar pops on growing debt ceiling impasse and Asia geopolitics
US Dollar pops on growing debt ceiling impasse and Asia geopolitics
- US Dollar gains some ground as Asian currencies take a step back.
- US debt-ceiling talks and geopolitical tensions triggered by Chinese ban on Micron lead the market action.
- US Dollar Index pairs back incurred losses from Monday.
The US Dollar (USD) is clawing its way back after a dismal session at the start of the week. The US Dollar Index (DXY) is showing signs of consolidation above a crucial support level, while tail risk is being priced in after US chip-manufacturer Micron got barred from China, with Japan and South-Korea eager to take over the business. A mild positive tone was the summary at the end of the first day of negotiations about the US debt ceiling this week, with a deal still possible.
On the macroeconomic data front, traders will be glued to their screens for the services numbers coming from the Purchase Managers Index (PMI) in the United States at 13:45 GMT. Add the Richmond Fed Manufacturing Index number for May briefly after that (14:00 GMT) and traders will have a good metric point in order to assess where to take the US Dollar next. On the other hand, a much lighter Fed speaker agenda on Tuesday with only Fed’s Logan giving welcome remarks at a conference on technology-enabled disruption.
Daily digest: US Dollar back in the green
- US Dollar printed a new monthly high against Chinese Yuan at 7.0671.
- US President Joe Biden confirmed after talks with US House Speaker Kevin McCarthy that a default is off the table.
- McCarthy came out and said talks were productive, but no deal yet. The tone of discussion was better than before.
- The United States is working with allies like South Korea and Japan to circumvent any chip supply disruptions after US chip-manufacturer Micron got barred in China.
- Next to Neal Kashkari, Fed’s Jim Bullard came out in support for at least one, preferably two rate hikes on Monday.
- Markets were briefly rattled on Monday by comments from Kashkari that the Fed will not bail out the US economy if a debt default occurs.
- The CME Group FedWatch Tool shows that markets are flip-flopping again after comments from Fed Chair Jerome Powell on Friday, have priced out again a rate hike for June, while an initial rate cut has been delayed until September instead of July before.
- The benchmark 10-year US Treasury bond yield trades at 3.72% and prints a new high for the past week. This could allow to pusht the US Dollar higher and the DXY further in the green.
US Dollar Index technical analysis: Can the uptrend continue?
The US Dollar Index (DXY) has taken out both the 55-day and the 100-day Simple Moving Averages (SMA), respectively, at 102.52 and 102.87 on the upside. Support held on Monday and is confirming continuation to the upside in order to challenge 103.61, the high of past Thursday.
On the upside, 105.76 (200-day SMA) still acts as the big target to hit, as the next upside target at 104.00 (psychological level, static level) acts as an intermediary element to cross the open space.
On the downside, 102.86 (100-day SMA) aligns as the first support level to make sure that . In the case that breaks down, watch how the DXY reacts at the 55-day SMA at 102.48 in order to assess any further downturn or upturn.
US Dollar FAQs
What is the US Dollar?
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.
How do the decisions of the Federal Reserve impact the US Dollar?
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.
What is Quantitative Easing and how does it influence the US Dollar?
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.
What is Quantitative Tightening and how does it influence the 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.
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