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- US Dollar extends descent, set to close second straight weekly loss
US Dollar extends descent, set to close second straight weekly loss
- The DXY Index declined to 103.45, a 0.30% loss.
- The index will tally a 0.30% weekly loss as well.
- S&P PMIs showed a mixed outlook, with the manufacturing sector weakening and the service sector expanding.
The US Dollar (USD) is receding on Friday with the DXY index, which measures the value of the US Dollar versus a basket of global currencies, declining toward 103.45 on the back of mixed S&P PMIs and dovish bets on the Fed.
In line with that, the US economy is showing overall signs of cooling inflation and job creation, and soft S&P PMIs flashed signs of a weakening economy. This economic outlook makes traders believe that the Federal Reserve (Fed) will adopt a less aggressive stance, which is weakening the US Dollar.
Daily Digest Market Movers: US Dollar faces further downside as the US manufacturing sector weakens
- The US Dollar Index traded weaker and declined toward 103.45 on Friday.
- In November, the S&P Global Composite PMI remained stable at 50.7, signalling slight growth in the US private sector.
- Manufacturing PMI fell to 49.4, indicating a shift into contraction, and the Services PMI increased marginally to 50.8.
- What worried investors seemed to be the report of the first employment decline in US service and manufacturing sectors since mid-2020, driven by lower demand and higher costs.
- The market response included expectations of a more cautious Federal Reserve, resulting in a weaker US dollar.
- Markets are confident that the Federal Reserve won’t hike in December and are betting on four rate cuts in 2024, beginning in May.
Technical Analysis: US Dollar hints at a potential reversal as the RSI approaches 30
Although the daily Relative Strength Index (RSI) is nearing oversold conditions, suggesting a somewhat oversaturated bearish market, it also indicates the potential to reverse the upside as selling pressure appears to wane. This notion is reinforced by the Moving Average Convergence Divergence (MACD), which displays flat red bars, signalling an easing of bullish sentiment without a clear direction.
In addition, the DXY’s position below the 20, 100, and 200-day Simple Moving Averages (SMAs) also suggests that the sellers have the upper hand.
Support levels: 103.40, 103.30, 103.15.
Resistance levels: 103.60 (200-day SMA), 104.00, 104.20 (100-day SMA).
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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