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- US Dollar strengthens as Israel-Gaza conflict triggers safe-haven flight
US Dollar strengthens as Israel-Gaza conflict triggers safe-haven flight
- The Greenback starts its week on a high note after breaking its weekly winning streak.
- Traders run for safety as Hamas attacked Israel over the weekend in its biggest offence in two decades.
- The US Dollar Index breaks back above 106.00 and looks primed to head higher.
The US Dollar (USD) is not able to enjoy the US public holiday on Monday. Despite Columbus Day, the Greenback is soaring higher after it gapped up on Sunday night amidst headlines from Hamas attacking Israel with a major offensive not seen in decades. All bets are off with safe havens seeing massive inflows.
With an empty economic calendar, expect this Monday’s moves to be driven by the Israel-Gaza conflict. Several headlines from world leaders and organisations like OPEC+ are driving safe havens higher. Israel is preparing for retaliation while it proclaimed that Iran is behind the attacks, with Western leaders not yet confirming or backing these findings, showing the sensitivity of the matter and the interest in Crude Oil supply out of the region.
Daily digest: US Dollar to remain elevated
- Amidst all the headlines around Israel and Hamas, two US Federal Reserve members are due to speak this Monday: Near 13:00 GMT, Dallas Fed President Lorie Logan is due to speak. Near 16:45 GMT, Fed Governor Philip Jefferson will also speak.
- Israel has issued a statement saying that Iran is behind the coordinated attacks. Thus far, Western leaders have refrained from backing this statement. Meanwhile, US naval ships are on route to the region to provide support for Israel.
- Equities are down, though starting to pare losses as market participants get a grip on the situation at hand. If this recovery continues, expect to possibly even see green numbers near the end of this Monday.
- The CME Group FedWatch Tool shows that markets are pricing in a 78.9% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November.
- The benchmark 10-year US Treasury yield is closed for the US holiday. Expectations would be that yields will drop as bids for safe US bonds will soar to enormous proportions.
US Dollar Index technical analysis: Week 13
The US Dollar is remorseless in its winning streak after a squeeze on Friday snapped its winning streak, which lasted for twelve weeks. The US public holiday keeps US bond markets closed, though where it was open, it would have triggered even more safe-haven flow into the Greenback. Expect for the US Dollar Index to still remain in its uptrend and look to reboot its weekly winning streak.
The US Dollar Index opened around 106.29, with the Relative Strength Index (RSI) easing down a touch after the DXY snapped its weekly winning streak on Friday. On the topside, 107.19 is important to see if the DXY can get a daily close above that level. If this 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, this barrier has just been broken to the upside, so it isn’t likely to be strong. Instead, look for 105.12 to 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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