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- US Dollar off the lows in a year of standstill
US Dollar off the lows in a year of standstill
- The US Dollar trades flat after its recovery in the close at the US session on Thursday.
- Equity markets are set to close off the year on a high note.
- The US Dollar Index pops back above 101, though flirts with a final close below it.
The US Dollar (USD) is trading sideways for now on this last Friday of the year and the very last trading day of 2023. Looking back at its performance overall for this year, the Greenback has lost only around 3% Year-To-Date on the US Dollar Index (DXY) chart since its first opening in January. The big theme for 2024 going forward looks to be whether markets have been too eager to price in rate cuts for the US Federal Reserve, or has the Fed lost its control and made a policy error?
On the economic front, traders can scalp the last pips of profit with the Chicago Purchase Managers Index (PMI) coming out this Friday. The Jobless Claims numbers from Thursday already triggered a small turnaround for the DXY. Should this Friday’s PMI numbers stay above 50 and even beat the expectation, the Greenback might make good on some earlier losses from this week.
Daily digest Market Movers: ‘It’s oh so quiet’
- Last data point for 2023 is printed near 14:45 GMT with the Chicago Purchase Managers Index. Expected is a decline from 55.8 to 51. A drop below 50, would mean contraction and will be substantially US Dollar negative, while either a beat of expectations or a print above the previous might see a very steep US Dollar rally in its turn.
- On the geopolitical front Russia has started a new missile offensive against Ukraine with several key cities being bombarded, casualties rising by the hour.
- Former US President Donald Trump will be placed back on the primary ballot in Colorado, though he is barred in the US State of Maine for the Primaries in March.
- Equities are extending the Christmas spirit and are trying to eke out those last percentage points of gains.
- Officially Japan has already closed off for this year and saw the Topix close up near 28% for 2023. The Topix closed off just above 25% for 2023.
- In China the Hang Seng Index was a bit of a let down for 2023, with the Index closing off down 13.82% for 2023.
- In Europe the German Dax is currently up over 0.25% for this Friday with a nice 20% return for 2023.
- In the US, Futures are all in the green for this Friday, prolonging the Christmas rally in the New Year. Overall for 2023, the Dow Jones is near 13% in the green for its overall performance, the S&P 500 near 25% profit and the Nasdaq around 44% gains.
- The CME Group’s FedWatch Tool shows that markets are pricing in an 83.5% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 16.5% expect the first cut already to take place.
- The benchmark 10-year US Treasury Note trades near 3.84%, off the lows and sees a bit of a squeeze to the upside since Thursday.
US Dollar Index Technical Analysis: The mind contradicts the heart
The US Dollar Index is having a change of heart on this last day of 2023. The window of opportunity is closing for traders who were short the Greenback and want to cash in on this rally. Expect to see some more US Dollar strength filter in on this last day of 2023, with traders starting to trigger more demand of US Dollar to cash in on their positions and start with a clean sheet in 2024.
First upside resistance to face is near 101.78 at the low of December 21. Although a long way to go, it looks not unthinkable that the DXY might test the descending trend line near 103.00. Depending on the catalyst that fuels the recovery in the Greenback, the 200-day Simple Moving Average (SMA) near 103.45 is firm last resistance before having more upside.
To the downside, the pivotal level at 101.70 – the low of August 4 and 10 – is now gone and holds no bearing anymore for support as it is too badly beaten up. The new support, near 100.82, aligns with the bottoms from February and April, and could still hold some relevance – it might hold for this Friday. Should that level snap, however, nothing will stand in the way of DXY heading to the sub-100 region.
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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