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- US Dollar edges further up, hurting global markets
US Dollar edges further up, hurting global markets
- The US Dollar broke higher on Tuesday against most currencies in another rate differential push.
- Tuesday’s US economic docket will feature housing market data.
- The US Dollar Index makes a new 10-month high above 106.00.
The US Dollar (USD) rolls yet again through the markets as concerns start to mount on what this could mean for markets in the latter part of 2023. With US bond yields rising again to new highs, the rate differential is clearly the main driver between the Dollar and other currencies. As stocks are starting to decline, bonds are being sold, questions arise if this is the start of a feared recession and hard landing for the US economy.
Plenty of data to dig in this Tuesday from the US housing sector, where the tighter and higher credit conditions are still awaited to filter in.. The Housing Price Index and Consumer Confidence Index will both likely be market moving for the Greenback. Headlines from Capitol Hill could be a game changer as well as a stopgap bill will be brought to the House floor later onTuesday.
Daily digest: US Dollar keeps pressing
- Minneapolis Federal Reserve President Neel Kashkari called for another interest-rate hike this year. Meanwhile, JP Morgan CEO Jamie Dimon has warned that US rates could head to 7%.
- On the economic data front, Tuesday will start with the US Redbook Index at 12:55 GMT for the week of September 22. In the prior week, the index rose 3.6%.
- The Housing Price Index for July is expected at 13:00 GMT. The monthly measure is expected to increase 0.1%, less than the 0.3% rise seen in June. The yearly figure is expected to show that prices declined 0.5%, less than the previous 1.2% fall.
- US Consumer Confidence data for September is expected at 14:00 GMT..
- Also at 14:00, the New Home Sales data for August will be published. In July, sales of new homes in the US increased 4.4% on month.
- The Richmond Fed Manufacturing Index for September will come in as well at 14:00 GMT. The index is expected to edge up marginally but to remain in negative, from -7 to -6.
- To close off, Michelle Bowman from the US Federal Reserve Board of Governors is expected to speak at 17:30 GMT.
- The US Treasury is to auction a 2-year note near 17:00 GMT.
- All red across the board in equity markets as investors’ mood soured after news that Evergrande missed an interest payment to foreign investors on Monday. Meanwhile, the stronger US Dollar and the bond sell-off is not helping risk sentiment to recover.
- The CME Group FedWatch Tool shows that markets are pricing in a 81.5% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November. The probability for an unchanged stance increased by the day as strikes at auto plants and a US potential government shutdown loom.
- The benchmark 10-year US Treasury yield traded as high as 4.54% and takes a small step back from Monday’s peak.
US Dollar Index technical analysis: Long way to new 52-week high
The US Dollar pushes the Relative Strength Index (RSI) into overbought territory after its outperformance on Monday. Traders remain focused and worried on the current and possibly persistent rate differential between the US Fed and other main central banks, which might keep the US Dollar stronger for longer. The US Dollar Index (DXY), which tracks the Greenback against a basket of other major currencies, broke above 106.00 and posted a new 10-month high.
The US Dollar Index opens above 106.00, though the overheated RSI might make it difficult to hold there. Traders that want to hit that new 52-week high need to be aware that a lot of road needs to be covered, towards 114.78. Rather look for 107.19, the high of November 30, 2022, as the next profit target on the upside.
On the downside, the recent resistance at 105.88 should be seen as first support. Still, it has just been broken to the upside, so it isn’t likely to be a strong barrier. . Rather look for 105.12 to do the trick and keep the DXY above 105.00.
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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