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- US Dollar loses steam after securing weekly gains
US Dollar loses steam after securing weekly gains
- The US Dollar is set to book another week of gains.
- No focal data points on Friday, so expect tepid market movements.
- The US Dollar Index fails again to hold the 105.00 level, and could start to peak.
The US Dollar (USD) has had a strong week after a series of US economic indicators appear to convince traders of the strength of the US economy . The path for the Greenback looks to be one of sideways to stronger against most major peers. The US economy is doing well and is on a trajectory for a soft landing, while economic activity in the Eurozone and Central Europe shows increasing signs of distress.
No real market moving data points on the calendar on Friday. Still, data about Wholesale Inventories for July will be released.The Baker Hughes US Rig Count data, to be published at the end of the trading day, could carry more weight than usual in the aftermath of the failed talks in Australia, which will likely lead to nearly 10% of the Natural Gas supply to be withdrawn in the coming weeks.
Daily digest: US Dollar looks happy where it is
- The main datapoint for this Friday is Wholesale Inventories data, which will come out at 14:00 GMT.. Expectations are for inventories to decrease by a marginal 0.1% in July, the same decline it registered in June.
- Baker Hughes US Oil Rig Count at 17:00 GMT will get a bit more attention as markets will look for clues over whether the US can supply itself with oil and natural gas now that 10% of global supply will be drawn from the markets as Australian LNG workers go on strikes.
- Equities in Asia are set to close this week in negative, with the last trading day also registering losses: The Japanese Topic Index closes down 1%. European equities are rather flat, though trading below zero as well.
- The CME Group 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 4.23% and is off the peak from earlier this week. Markets have been able to digest a substantial amount of debt issuances, which was one of the elements that pushed yields higher.
US Dollar Index technical analysis: Soft landing
The Greenback is back in favor and is rolling through the markets, weighing one equity and bond markets with lower bond prices and stocks dropping below several important support levels. The Greenback is extending its summer rally and could stay steady at stronger levels throughout the fall and winter if other central banks start cutting their benchmark interest rates. With the US Dollar remaining steady, depreciating currencies will push the US Dollar Index substantially higher and might see more Dollar strength to come.
All eyes stay on 105.00 after the DXY briefly broke the level on Wednesday and Thursday. Only a few cents to go and the DXY will be at a new six-month high once it is able to close there. The next levels are at 105.88, March’s high, which would make a new yearly high. If the index reaches this last level, some resistance might kick in.
On the downside, the 104.30 figure is vital to keep the US Dollar Index sustained at these elevated levels. Some room lower, the 200-day Simple Moving Average (SMA) at 103.04 comes into play, which could bring substantially more weakness once the DXY starts trading below it. The double belt of support at 102.68, 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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