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- US Dollar rally continues as US credit downgrade looms
US Dollar rally continues as US credit downgrade looms
- US Dollar books gains against most of its peers as the Greenback retains safe haven status.
- US debt-ceiling talks linger on while Fitch issues a negative outlook for the US credit rating.
- US Dollar Index breaks 104 and jumps higher, next level on the upside is at 105.
The US Dollar (USD) is heading higher in what looks to become a rally for this week with a four-day winning streak. Comments overnight from US Treasury Secretary Janet Yellen and the FOMC Minutes only confirmed that the current play with the USD as safe haven is still very much valid. Meanwhile US debt-ceiling talks ended again unresolved but with good progress according to US House Speaker Kevin McCarthy.
On the macroeconomic data front, traders can look at the second estimate of US Gross Domestic Product (GDP) numbers for the 1st quarter at 12:30 GMT. Initial Jobless Claims at that same time will show a glimpse of how the employment market is doing. Throughout the day it will be worth wild to keep an eye on 1-year US Treasury Bills (T-bills) as they have been soaring to 7% on Wednesday, with US Credit Default Swaps (CDS) back at the highs. Fed officials are set to speak with Thomas Barkin talking at 13:30 GMT at an Economic Forum and then Susan Collins at 14:30 GMT.
Daily digest: US Dollar the place to be
- US Treasury Secretary Yellen reiterated that the US government may run out of cash as of June 1st and that some obligations will be unable to be paid after that day. Some stress in financial markets currently at hand might substantially escalate further if a deal is not found.
- Kevin McCarthy concluded the talks on Wednesday with no deal, but good progress.
- FOMC Minutes underlined again that the Fed remains data-dependent with cuts unlikely while inflation is still unacceptably high.
- Fitch issued a negative outlook for its AAAu credit rating of the United States.
- US Credit Default Swaps (CDS) jumped higher for a third day in a row and are nearing the peak of last Wednesday.
- US equity futures are mixed with Nvidia (NVDA) keeping the Nasdaq in the green.
- The CME Group FedWatch Tool shows that markets are pricing in a 50% chance of rate hike for July after hawkish comments from Federal Reserve officials Jim Bullard and Neal Kashkari. Rate cuts have moved down the line to as early as November 2023.
- The benchmark 10-year US Treasury bond yield trades at 3.75% and flirts with another two-month high after as it is set to take out the high of Tuesday.
US Dollar Index technical analysis: Hiccup in Washington pauses uptrend
The US Dollar Index (DXY) has taken out both the 55-day and the 100-day Simple Moving Averages (SMA), respectively, at 102.43 and 102.85 on the upside. The safe haven status keeps seeing bids for the DXY with 104 having been broken early on Thursday, during the European trading session. The next target becomes 105.
On the upside, 105.74 (200-day SMA) still acts as long-term price target to hit, as the next upside key level for the US Dollar Index is at 104.00 (psychological, static level), and acts as an intermediary element to cross the open space.
On the downside, 102.85 (100-day SMA) aligns as the first support level to confirm a change of trend. 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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