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- US Dollar weakens against Asian peers in a thinly traded session
US Dollar weakens against Asian peers in a thinly traded session
- The US Dollar nudges lower against almost every major pair.
- No economic data or Fed comments are expected.
- The US Dollar Index cracks below 103.00 and could eke out more losses if the US Dollar remains sold.
The US Dollar (USD) is officially on holiday, though it is traded and quoted in other parts and countries of the world. The US bond and equity market is closed and US futures are expected to trade at very low volumes. A thin market is an ideal moment for some investors, funds or central banks to make a move, and this happened this morning with the Chinese Yuan, which booked substantial gains against the Greenback. The correction pushes the USD/CNY pair to a month low, and drags South Korean Won (KRW) alongside it.
On the datafront, nothing out of the US as most events are pushed forward to later this week. Expect to see traders keep their powder dry for Friday with the US jobs report coming out. On Tuesday, all focus will be on the next-best-thing, which is Canada publishing its Manufacturing Purchasing Managers Index (PMI). The reading, which will be published at 13:30 GMT, is expected to increase slightly to 49.6 from 49.
Daily digest: US Dollar in the ropes
- Geopolitical tensions flare up as Yellen is set to fly to China soon. On Monday, China restricted exports of two key components for making chips, and the US is looking into restricting access to cloud computing for China. The tug-of-war between China and the US looks to be far from over.
- The United States is enjoying Independence Day. Both the Bond market and equity trading floors are closed.
- The US Dollar hit monthly lows against the Chinese Yuan (USD/CNY), the South Korean Won (USD/KRW), the New Zealand Dollar (USD/NZD), the Norwegian Krone (USD/NOK) and the Australian Dollar (USD/AUD).
- Mixed picture in equity markets as Japan is firmly in the red, losing 0.62%, while the Chinese Hang Seng is up 0.60% for the day. Europe registers mild gains, but no real rallies to notice. US futures are flat and are hardly moving as volume is low due to the holiday in the US.
- The CME Group FedWatch Tool shows that markets are pricing in a 87.4% chance of a 25 basis points (bps) interest-rate hike on July 26. The dislocation between market expectations and what the Fed has been communicating in terms of number of rate hikes is still persistent and could trigger a stronger US Dollar once markets get to the point of realisation.
- The benchmark 10-year US Treasury bond yield halted trading at 3.85% on Monday night and will not start trading again until the opening of the Asian session on Wednesday.
US Dollar Index technical analysis: USD to say goodbye to 103.00?
The US Dollar is lower this morning as US traders are enjoying a day off, while Asian markets are using their absence to appreciate local currencies. The Chinese Yuan is gaining substantially against the Greenback, while in the past few days or weeks even, the Chinese coin was in a losing streak against the US Dollar. With only two or three very small gains for the US Dollar on an overall downbeat day, it looks that the DXY index will make more losses today depending on technical support levels that either hold or break.
On the upside, look for 103.54 as the next key resistance level, which falls in line with the high of last week. The 200-day Simple Moving Average (SMA) at 104.94 is still quite far away. So the intermediary level to look for is the psychological level at 104.00 and May 31 peak at 104.70.
On the downside, the 55-day SMA near 102.74 has proven its importance as it clearly underpinned price action on Friday and Monday by triggering a turnaround after the firm weakening of the Greenback. A touch lower, 102.50 will be vital to hold from a psychological point of view. In case the DXY slips below 102.50, more weakness is expected with a full slide to 102.00 and a retest of June’s low at 101.92.
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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