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- US Dollar steadies at opening of Fed rate-decision week
US Dollar steadies at opening of Fed rate-decision week
- The US Dollar trades mixed at the opening on Monday.
- Traders will likely keep powder dry for the main Fed event on Wednesday.
- The US Dollar Index resides above 105.00, struggling to make new highs.
The US Dollar (USD) was able to close a ninth consecutive week in the green, which makes it almost one of its longest winning streaks. Despite the strength, some signs are starting to mount that the rally might come to an end soon. Although last week got closed in the green for the USD, the University of Michigan inflation expectations components showed that participants believe the US Federal Reserve (Fed) should be nearly done hiking – and this isn’t good news for the Dollar.
The week presents a very light economic calendar that is unlikely to have much impact on current levels. Until Wednesday, some selling pressure is expected, particularly if the US Dollar is unable to break higher. This means that the US Dollar Index (DXY) is at risk of retreating, easing a touch away from a new six-month high.
Daily digest: US Dollar softens
- There is a very light calendar on Monday, in a week in which the focal point will be the US Federal Reserve rate decision.
- The National Association of Home Builders will issue its Housing Market Index for September at 14:00 GMT. Expectations are for an unchanged number at 50.
- The US Treasury Department will auction a 3-month and a 6-month bill.
- Equities are a bit mixed, without a clear direction on Monday. Some disappointing comments from Societe Generale failing to impress investors is putting some selling pressure on European bank shares.
- The CME Group FedWatch Tool shows that markets are pricing in a 97% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September after the recent PPI and Retail Sales numbers.
- The benchmark 10-year US Treasury bond yield trades at 4.35%, and peaked in early Monday trading.
US Dollar Index technical analysis: Afloat until Wednesday
The Greenback had a bit of a rough ride, though the economic conditions compared to Europe and other countries still make it stand out and shine. This makes investors to still flock into the Greenback already for the high rates investors get paid out on the back of it. The question for this week will be if the US Dollar Index can stay above 105.00 even if the Fed delivers a rate pause.
The US Dollar Index (DXY) has edged up, reaching 105.41. This is just a sigh away from the 2023 high near 105.88. Should the DXY be able to close above there for the week, expect the US Dollar to go even stronger in the medium-turn.
On the downside, the 104.44 level seen on August 25 kept the Index supported on Monday, not allowing the DXY to sell off any further. Should the uptick that started on September 12 reverse and 104.44 gives way, a substantial downturn could take place to 103.04, where the 200-day Simple Moving Average (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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