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- US Dollar looks for direction as risk of US government shutdown looms
US Dollar looks for direction as risk of US government shutdown looms
- The US Dollar trades mixed on Monday as US government shutdown risk escalates.
- In the background traders will be on edge for US GDP numbers later this week.
- The US Dollar Index resides near the six-month highs.
The US Dollar (USD) confirmed its status as king after a quite volatile week. The US Federal Reserve could not have been more clear and confirmed yet again that rates in the US will stay higher for longer. This puts the US Dollar as the strongest partner in most trading pairs due to interest rate differentials.
Amidst all the noise on the macroeconomic front, traders did not really care about the US government shutdown until this coming Friday evening. When House Speaker Kevin McCarthy sent all Representatives packing for the weekend last Friday, traders became aware that a deal might again not happen until the final hour. This means some risk premium, on the back of a weaker US Dollar, might emerge as days pass without any hopeful signals from Capitol Hill on a possible deal.
Daily digest: US Dollar to see GDP hit by strikes
- A very calm start of the week has begun with the Chicago Fed National Activity Index for August being released at 12:30 GMT. The previous number was 0.12.
- The US Dallas Fed Manufacturing Business Index for August is expected to come out near 14:30 GMT and was in contraction at -17.2 for July.
- The US Treasury will be auctioning 3-month and 6-month bills at 15:30 GMT at elevated rates.
- A big dispersion in the equity markets shows its face at the start of the week in Asia: Japanese stocks rally with both the Topix and the Nikkei in the green. China, meanwhile, sees Hong Kong’s Hang Seng Index tank near 1.5% as Evergrande cancelled a meeting with creditors to renegotiate terms. European and American futures are down and show signs of risk off, seeing all the current tail risks taking over sentiment.
- The CME Group FedWatch Tool shows that markets are pricing in a 77% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November. The recent turmoil on Capitol Hill and the United Auto Workers (UAW) strike could force the Fed to keep rates unchanged through the end of the year.
- The benchmark 10-year US Treasury yield traded as high as 4.69% and resides near the highest level since October 2007.
US Dollar Index technical analysis: Can it get there?
The US Dollar looks to be stuck in a stalemate with the rate differential keeping the US Dollar holding an advantage against most major G20 currencies. On the other side, the automaker strike in Detroit and possible US government shutdown could weigh on the Greenback over the short term. The US Dollar Index (DXY) is looking for direction in this difficult environment.
The US Dollar Index opens up above 105.50 this Monday and shows small signs of possibly going higher. 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 and the unwinding of the US strike and government shutdown 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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