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- US Dollar trades flat, Fed officials hint at fewer rate cuts in 2024
US Dollar trades flat, Fed officials hint at fewer rate cuts in 2024
- The DXY stood around 104.15 on Wednesday.
- Fed’s Collins, Kashkari and Kugler were on the wires sounding somewhat hawkish.
- US Treasury yields are slightly up and limit the Greenback’s losses.
The US Dollar Index (DXY) is trading neutrally at 104.15 on Wednesday, while markets assess several Federal Reserve (Fed) officials' statements to continue placing their bets on activity at the next few Federal Open Market Committee (FOMC) meetings.
The US Federal Reserve's hawkish hold, justified by a robust jobs report and continuous strong growth in Q1, has made dovish bets on the Fed less attractive over the past week. As a reaction, the USD strengthened on the back of rising US Treasury yields as markets are giving up on a first rate cut arriving in March.
Daily digest market movers: US Dollar holds its ground as markets assess Fed officials’ comments
- Fed’s Adriana Kugler noted that the job on inflation isn’t quite done, but that at some point when the economy cools down, the bank will consider rate cuts.
- Elsewhere, Neel Kashkari stated that two to three rate cuts in 2024 seem appropriate.
- In line with those comments, Susan Collins also cautioned that the bank needs more data to support rate cuts.
- The CME's FedWatch Tool hints at reduced odds for a rate cut in March, which currently stands at 20%. Those odds rise to 50% for the May meeting, but the probabilities of a hold are also high.
Technical analysis: DXY falls below the 100-day SMA, but bulls trim daily losses
The technical indicators on the daily chart reflect a somewhat neutral to bearish short-term momentum. The Relative Strength Index (RSI) paints a picture of weakening bullish momentum, given its negative slope, despite being in positive territory. This condition normally precedes a potential reversal or pullback as the buying force starts to lose its grip.
In the bigger picture, the Simple Moving Averages (SMAs) continue to favor the bulls. Despite the selling pressure pulling the asset below the 100-day SMA, it is comfortably residing above both the 20-day and 200-day SMAs. This demonstration implies that the overall buying force remains dominant.
These signals suggest while the buyers seem to be taking profits, further downside can be expected in the short term. But as long as the bulls defend the mentioned SMAs, the longer-term outlook will be bright.
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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