The US Dollar (USD) is getting gutted by the markets after US yields soared to a new multi decade high. It almost sounds Shakesperian as it was those same yields that have supported the summer rally in the Greenback from July up until mid-October. As yields in the 10-year benchmark breached the psychosocial 5% level, the Greenback got sold across the board and made the US Dollar Index incur its biggest intraday loss since July.
On the economic data front, some further moves might be anticipated with the Purchase Managers Index (PMI) numbers for October due to come out. Markets will get the chance to have a look how the leading indicator behaves and is telling us in terms of outlook for the US economy in the near future. Especially the Services component could be a catalyst as it was previously just above 50, and a break below 50 would mean an economy in contraction with more US Dollar weakness to be factored in.
The US Dollar lost its status as King Dollar after US yields, specifically the US 10-year yield, broke above 5%. In financial markets often 5% is seen as the pain threshold where, once above, red lights will start to flash in terms of recession possibilities, shrinking economy and a stand still or contraction growth. With the US PMI numbers later this Tuesday, risk at hand is that the US Dollar Index might add another leg lower to its losses for this week.
In order to recover, the DXY needs to break back above 105.88 and preferably even break above the high of Monday at 106.33. Once that is the case, Dollar bulls are reassured that plenty of Greenback is in play and this correction was just a blip on the hot plate. On the high end 107.20 still remains the level to beat for the year.
On the downside, the recent resistance at 105.88 did not do a good job supporting any downturn and now completely has lost its importance. Instead, look for 105.12 to keep the DXY above 105.00. If that fails to do the trick, 104.33 will be the best level to look for resurgence in US Dollar strength, as it aligns with the 55-day Simple Moving Average (SMA) as a support level.
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.
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.
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.
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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