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- US Dollar plunges to multi-month lows amid dovish Fed
US Dollar plunges to multi-month lows amid dovish Fed
- The DXY Index hovers around 101.90, presenting its lowest level since August.
- Despite positive Retail Sales Figures from November, the US Dollar continues to weaken.
- The Greenback is suffering the aftermath of Wednesday’s Fed announcement.
- The yield on the 2-year US bond declined to its lowest since June.
The US Dollar (USD) declined to 101.80, its weakest position since August. The Federal Reserve's (Fed) unexpected hint at three rate cuts for 2024 weighs heavily on US Treasury yields and the Greenback.
In the last meeting of the Fed in 2023, the bank welcomed cooling inflation figures, and the revised Dot Plot suggests Fed governors aren't seeing any rate hike in 2024. Additionally, they forecasted 75 basis points of easing. This means that the market expectations are aligning with the bank's stance, which is cheered by markets as it fuels risk-on flows.
Daily Market Movers: US Dollar loses ground, despite positive Retail Sales figures, US yields in multi-month lows
- The Fed hinted at a triad of rate cuts expected for 2024, which applied pressure on the US dollar.
- The November Retail Sales report by the US Census Bureau indicated a 4.1% (YoY) increase, a stronger performance than the 2.2% increase of the previous month.
- The US Department of Labor reported Initial Jobless Claims for the week ending on December 9 at 202K, slipping beneath the 220K consensus and previous 221K figures, signaling an unexpectedly healthy job market.
- Currently, US bond yields are decreasing, with rates at 4.35% for the 2-year yield, 3.87% for the 5-year yield, and 3.91% for the 10-year yield.
- The CME FedWatch Tool projections suggest that markets foresee rate cuts as early as March 2024.
Technical Analysis: DXY Index bears take the lead, indicators dive to negative zone
The Moving Average Convergence Divergence (MACD) histogram shows rising red bars, a signal typically associated with bearish momentum, while the Relative Strength Index (RSI) is nearing oversold conditions, adding further confirmation that the bears command price movement.
Furthermore, examining the Simple Moving Averages (SMAs), the index is positioned below the 20, 100 and 200-day SMAs, indicating a dominant bearish bias in the larger context. This suggests that despite the oversold RSI hinting at temporary relief, the overall selling pressure remains strong, and the bears continue to dictate the price action.
Support levels: 101.50, 101.30, 101.00.
Resistance levels: 103.45 (20 and 200-day SMA bearish crossover), 104.50 (100-day SMA), 104.70.
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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