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- US Dollar jumps in catch up after lacklustre Monday
US Dollar jumps in catch up after lacklustre Monday
- US Dollar price jumps higher across the board on Tuesday in European trading.
- The PBoC failed to fix its Yuan stronger, while European PMI data suggest contraction in the eurozone economy.
- The US Dollar Index consolidates above 104.00 and could post a new yearly high.
The US Dollar (USD) jumps higher against every G20 peer on Tuesday as US markets reopen after the Monday holiday. Many tailwinds are helping the Greenback to edge higher. The US appears to be the single green spot in terms of economic performance, with Goldman Sachs erasing its projection for a recession or hard landing as the last bank standing. Meanwhile, both China and Europe seem to be lagging behind. Recent Purchasing Managers Index (PMI) data suggested a slowdown in China’s services sector, while it showed a persisting contraction in Europe, adding to signs that the old continent’s economy could be on the verge of a hard landing.
There is a very light economic calendar this week. Nonetheless, every datapoint could add to the conviction that the US is actually the place to be in order to pursue that soft landing. One datapoint to watch will be Factory Orders at 14:00 GMT, which is expected to contract slightly and might cause some paring back of this US Dollar strength..
Daily digest: US Dollar firm
- The People's Bank of China (PBoC) tried to squeeze speculators in their Yuan currency by fixing it substantially lower. Markets shrugged off the strong fixing and devalued the Yuan substantially further against both the Euro and the US Dollar.
- The weekly Redbook Index is expected at 12:55 GMT. Previous was at 4.2%.
- Factory Orders, at 14:00 GMT, are expected to contract 0.1% in July on month after increasing 2.3% in June.
- The US Treasury will be very active with three auctions on Tuesday: a 3-month, a 52-week and a 6-month Bill will be auctioned.
- Total Vehicle Sales data for August will come out at 19:30 GMT. Previous figure was 15.7 million.
- Equities present a red picture halfway through the European trading session, with the Chinese Hang Seng as the biggest loser, down 2.06%. European equities are in the red after EU PMI numbers pointed to a full contraction for the top five biggest economies in the EU bloc. US futures have taken this negative tone.
- In the central bank interest rate differential between the Eurozone and the US, the projection of an additional hike by the ECB has been erased due to the downbeat PMI numbers. This made the Euro depreciate substantially against the Greenback.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 93% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September.
- The benchmark 10-year US Treasury bond yield trades at 4.21% and gapped higher at the opening bell in Asia after trading was halted on Monday for the US Labor Day holiday.
US Dollar Index technical analysis: strongest in the pack
The US Dollar turns substantially higher against every main G20 currency, with several US indicators outpacing foreign indicators in terms of economic growth. It looks like the US and its Federal Reserve will be able to succeed in engineering a soft landing, whereas this is highly uncertain on the other side of the Atlantic Ocean. This makes the US Dollar more popular from an investment point of view.
The number to beat for the US Dollar Index (DXY) is 104.69 intraday, which is not far as the index already peaked at 104.66. So only a few cents to go and the DXY will be at a new six-month high. Next levels are at 105.23, the high of March 2022, making it an 18-month high. If the index reaches this last level, some resistance might kick in.
On the downside, the big 104.00 figure is vital to hold and keep the US Dollar Index sustained at these elevated levels. Some room lower, the 200-day Simple Moving Average (SMA) at 103.06 comes into play, which could bring substantially more weakness once the DXY starts trading below it. The double belt of support at 102.42, with both the 100-day and the 55-day SMA, are the last lines of defence before the US Dollar sees substantial and longer-term depreciation.
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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