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- US Dollar unmoved by US bond shock in Israel-Gaza fallout
US Dollar unmoved by US bond shock in Israel-Gaza fallout
- The Greenback cannot bank on the risk of flight from Monday.
- Fed’s Logan and Jefferson delivered a message that the Fed is done hiking.
- The US Dollar Index breaks below 106 but faces selling pressure.
The US Dollar (USD) is seeing its gains from Monday being erased as the flight to safety eased quite quickly. Markets were quite quick to assess the situation in Israel and Gaza. For a minute, markets were bracing for a possible spillover in the region to the bigger oil-producing countries, though it was until late Monday evening when Saudi Crown Prince Mohammad bin Salman issued a statement urging both parties to come to the table and discuss opinions instead of reverting to violence.
The US markets need to catch up a bit with events as several US markets were closed on Monday for the public holiday. On Monday, both Dallas Federal Reserve (Fed) President Lorie Logan and Fed Governor Philip Jefferson said that interest rates have reached the end of their hiking path. Meanwhile, the US bond markets sees prices peaking and yields dropping in a catch-up move from Monday’s reduced schedule.
Daily digest: US Dollar facing some pressure
- At 10:00 GMT on Tuesday the National Federation of Independent Business’ (NFIB) Business Optimism Index for September was released. Previous number was 91.3, with the current number a touch lower near 90.8.
- Near 12:55 GMT, the YoY Redbook Index is due to come out. Expectations are for an unchanged print at -0.1%. Fed’s Minneapolis director Neel Kashkari is due to speak near 19:00 GMT. Mary Daly from the San Francisco Fed is due to speak near 22:00 GMT.
- The US Treasury is heading to the markets to refund some tenures. A 3-month and a 6-month bill are due to be issued together with a 3-year note auction.
- Christopher J. Waller from the Fed’s Board of Governors is expected to speak at 17:30 GMT.
- Equities are in the green as risk in the Middle East region looks to be contained for now. Asian equities soar over 2% with Japanese indices leading the charge. European equities are up over 1%. Meanwhile, US equity futures are rather reluctant and stick to rather flat quotations.
- The CME Group FedWatch Tool shows that markets are pricing in an 87.5% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November.
- The benchmark 10-year US Treasury yield was closed on Monday due to the public holiday and has played catch-up with recent events. The result was quite a move upward in bond prices higher and yields sinking lower to 4.67%, down from the 4.88% seen on Friday.
US Dollar Index technical analysis: Questions raised
The US Dollar was unable to thrive in the risk-off sentiment on Monday and was hardly making any waves. Where one would expect the Greenback to advance substantially against most major peers, the moves from Monday have already been erased this Tuesday on the quote board. The US Dollar Index (DXY) is starting to flirt with a turn for the worse and might head lower in the coming days.
The US Dollar Index opened around 105.96, with the Relative Strength Index (RSI) easing down further after the DXY snapped its weekly winning streak last 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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