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- US Dollar erases Monday’s off day with an early rally
US Dollar erases Monday’s off day with an early rally
- The US Dollar flips 180 degrees on Tuesday, paring back losses from Monday.
- The US Treasury is set to auction its always important 10-year note.
- The US Dollar Index jumps back above 104.50 and looks set to stretch back to 105.
The US Dollar (USD) is recovering firmly as it is parring earlier losses from Monday. The biggest supporter for the stronger Greenback in European trading hours is the Polish Zloty (USD/PLN), which is up 1.40% intraday. The surprise rate cut from the Polish Central Bank last week is weakening the Central European currency for a fourth straight day against the Greenback.
Although the calendar is still holding any important data points, expect traders to start prepositioning for the US Consumer Price Index report (CPI) due Wednesday. The Bid/Cover ratio in the US 10-year note, meanwhile, will give investors good insight into whether participants believe the US can still bear these higher rates and refund its maturing debt in the meantime. Expect to see yields creep higher again in the US as ample supply is being issued yet again in the markets.
Daily digest: US Dollar stronger by debt
- Traders will have seen a blip on several charts in Euro and US Dollar against other currencies around 01:00 GMT. Several banks are confirming that a fat-finger event occurred where a $600 million forex order was given, instead of the foreseen $60 million. The peak or dip was quickly pared back once the mistake was discovered, though it triggered anomalies across the board in several major pairs.
- Kick-off for the US macro data this week is at 10:00 GMT for the Business Optimism Index from the National Federation of Independent Business (NFIB). The previous number was at 91.9 with no expectations pencilled in.
- Near 12:55 GMT, the US Redbook Index is expected with the previous number at 4.1%. No expectations foreseen here.
- At 17:00 GMT, the much anticipated US 10-year note will be auctioned. The previous rate was at 3.99% and is expected now to be above 4%. Traders will look at the bid-cover ratio as well to see how big the appetite was for this auction as yields will be fixed higher.
- Equities are taking a small step back after the Japanese Topic Index closed up 0.80% for this Tuesday.
- 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 4.28% and remains elevated even after the step back on Monday.
US Dollar Index technical analysis: Resilient Greenback
The Greenback has already pared back more than half of its incurred losses from Monday. The winning streak from last week got briefly interrupted and could be seen continuing. Should the US Dollarindex (DXY) break above the high of Monday, expect to see another upbeat week for the US Dollar Index
The new high to watch is at 105.16, both the high from last Thursday and the six-month high. The US Dollar Index first needs to gain back its lost territory from this Monday and break above the peak of Thursday mentioned here before. From there, the next high is at 105.88, the high of 2023.
On Monday, 104.44 kept it together and refrained from allowing the DXY from selling off any further. The high of August 25 did its job and acted as a pivotal level. Should the uptick from this Tuesday reverse and 104.44 gives way, a substantial downturn could take place to 103.04, where the 200-day SMA comes into play for support.
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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