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- US Dollar locks in weekly gains backed by higher US yields
US Dollar locks in weekly gains backed by higher US yields
- The US Dollar trades mixed on Friday with some profit taking after another ferocious week.
- The focal point to end the week will be the PMI numbers for the US.
- The US Dollar Index resides near new six-month high
The US Dollar (USD) had another strong day on Thursday, booking gains against nearly every major G20 currency. Backed by higher US yields, the Greenback advances in an environment where the rate differential seems to be the driving factor to determine which currency weakens and which appreciates. With the US 10-year yield hitting 4.51%, breaking above the high of October 2007, it looks like King Dollar is affirming its earned title.
There might be some tempering to this party depending on the US Purchasing Managers Index (PMI) data released by S&P Global later Friday. The data will provide fresh insight on the state of the country’s key manufacturing and services in September, after August data showed that manufacturing activity dropped into contraction and services recorded a very mild expansion.. Should both numbers fall fully into contraction, expect to see some unwinds from those US Dollar long positions toward the weekend.
Daily digest: US Dollar seeks confirmation from PMIs
- Strikes are continuing in the major three car procedures with no positive headlines to report ahead of this Friday’s deadline.
- No breakthrough to report neither on the looming US Government shutdown.
- Traders will be on edge near 13:45 GMT for the S&P Global Purchasing Managers Index (PMI) numbers: the Manufacturing PMI is expected to head from 47.9 to 48, while the Services PMI is anticipated to edge up from 50.5 to 50.6. The Composite PMI, which tracks performance of both manufacturing and services, is also seen little changed around the previous 50.2 reading.
- Baker Hughes US Oil Rig Count data will come at 17:00 GMT. Previous number was 515. Energy remains a weak spot in the inflation bag that the Fed can not control in order to get inflation back to 2%. With the Baker Hughes Rig Count numbers remaining very low in the past few months, an energy deficit could linger in the US during the winter, pushing energy prices further up.
- Big dispersion in the equity markets: Japanese Nikkei and Topix reside in the red, down 0.50%. In China, both the Hang Seng and the CSI 300 indexes are up over 1.50%. In Europe, equities are opening flat while US futures are pointing to the green .
- The CME Group FedWatch Tool shows that markets are pricing in a 73.8% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November. The last rate hike is expected for either December or January.
- The benchmark 10-year US Treasury yield traded at one point at 4.51%, the highest level since October 2007. It later fell back to 4.48%. The rate differential story remains the main driver in the forex space.
US Dollar Index technical analysis: getting tired
The US Dollar looks set to close this week with another positive print in the US Dollar index (DXY). King Dollar has yet again confirmed its status, though there looks to be some fatigue creeping in the price action. This afternoon’s PMI numbers will be crucial to either see a final attempt for a new yearly high or rather a drop back to 105.00 or lower.
The US Dollar Index (DXY) goes sideways after reaching 105.68 on Thursday. Should the DXY close above the yearly high near 105.88, expect the US Dollar to follow on with more bullish moves in the medium term. US yields will remain crucial to support current levels in the DXY.
On the downside, the 104.44 level seen on August 25 kept the Index supported on Monday, halting the DXY from selling off any further. Should the uptick that started on September 12 reverse and 104.44 give 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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