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- US Dollar challenges 11-month high as rally goes rogue
US Dollar challenges 11-month high as rally goes rogue
- Traders sell precious metals with Copper, Gold, Silver plunging to yearly lows.
- Focal point this week is US Nonfarm Payrolls on Friday.
- US Dollar Index breaks above 107 and prints 11-month high.
The US Dollar (USD) seems to like the number 11 as the Greenback was able to book its eleventh week of gains last week and currently has breached the eleventh-month high at 107.21. King Dollar is not going away any time soon as US Federal Reserve Chairman Jerome Powell on Monday evening communicated to the markets that the central bank will advance with careful decisions on rates and that rates will remain elevated to get inflation down to 2%.
It thus does not seem that this rate differential story will go away anytime soon, unless something fundamental happens. After the recent Institute of Supply Management (ISM) numbers, it becomes clear that the US economy is still withstanding these elevated rates. Focus this Tuesday will be on the JOLTS job posting numbers to see if there is a slowdown in labor demand, which could tip the scale in the coming months.
Daily digest: US Dollar goes big
- At 12:55 GMT, the lighter data calendar for this Tuesday kicks off with the weekly Redbook Index. Previous print was 3.8%.
- Near 14:00 GMT, all eyes will be on the JOLTS Job Openings for August. Although it is a backward-looking indicator, it will tell a bit more about the appetite and demand for the labor force. Will the downtrend continue as the previous number was 8.827 million with projections at 8.83 million, meaning a standstill is expected.
- The US Treasury will hit the markets again and needs to place a 52-week bill at these elevated levels.
- Equities are not dealing well with this stronger Greenback and are sinking lower. Several equities indices are trading in the red for the year: In Asia, markets are red across the board with the Nikkei and Topix indices sinking more than 1%. The Hang Seng is down over 2%. European equities are hovering around 0.50% in the red, while US equity futures are mildly in the red.
- The CME Group FedWatch Tool shows that markets are pricing in a 74.3% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November.
- The benchmark 10-year US Treasury yield is lower at 4.69% printing a new high yet again for the year. The rate differential story is back as a driving force in the US bond market.
US Dollar Index technical analysis: This is not going to end soon
The US Dollar Index is on track to become the trade of the year. WIth several equity indices trading in the red for their performance in 2023, and precious metals hitting several floors. The US Dollar seems to be the only place to get a solid return, together with Crude oil prices. The importance of the US data will become even more important in order to time when this US Dollar cycle will come to an end.
The US Dollar Index opened around 107.21, though the overheated Relative Strength Index (RSI) is acting up again and heading back into an overbought regime. With 107.19 – the high of November 30, 2022 – being tested as we speak, it will be important to see if it can get a daily close. If that is the case, 109.30 is the next level to watch.
On the downside, the recent resistance at 105.88 should be seen as first support. Still, that barrier has just been broken to the upside, so it isn’t likely to be strong. Instead, 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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