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- US Dollar holds up recovery as US recession fears ebb
US Dollar holds up recovery as US recession fears ebb
- The US Dollar falls slightly but holds the recent recovery, which was driven by Thursday’s upbeat US data.
- Robust US Retail Sales growth and lower weekly Jobless Claims diminish the risks of a hard landing.
- Traders pare bets favoring a 50 basis point interest-rate cut by the Fed.
The US Dollar (USD) edges lower in Friday’s European session but holds the recovery seen on Thursday as traders’ fears about a recession in the United States (US) ebb. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, hovers near 103.00 after recovering from a 10-day low of 102.27 on Thursday.
The Greenback bounced back strongly after upbeat US economic data also supported bond yields. 10-year US Treasury yields fall to near 3.91% in European trading hours, but are decently up from their weekly low of 3.81%.
The data on Thursday showed that the US Retail Sales grew at a robust pace in July after contracting in June. Retail Sales, a key measure of consumer spending, rose strongly by 1% against expectations of 0.3%, diminishing fears of a hard landing.
Also, fewer-than-expected Americans filing for jobless benefits for the first time for the second consecutive week indicated that labor market conditions are not as bad as they seemed after the release of the Nonfarm Payrolls (NFP) data for July. The US Department of Labor showed that Initial Jobless Claims came in at 227K, lower than estimates of 235K and the prior release of 234K.
Daily digest market movers: US Dollar edges lower as bond yields fall
- The US Dollar holds its recovery move as upbeat US economic data has dashed market expectations that the Fed will begin its policy-easing cycle with an aggressive approach. Market participants started anticipating a 50-basis-point (bps) interest-rate reduction from the Fed in September amid worries that the US could enter a recession.
- According to the CME FedWatch tool, 30-day Federal Finds Futures pricing data shows that the likelihood of a 50-bps interest-rate reduction has diminished to 29.5% from the 51% recorded a week ago. However, the speculation that the Fed will cut rates in September remains intact.
- Meanwhile, Fed policymakers have also admitted that interest rate cuts have become appropriate as risks have now widened to the labor market too. This week, Atlanta Fed Bank President Raphael Bostic said in an interview with the Financial Times (FT) that he is open to rate cuts in September. When asked about the rate cut size, Bostic said that he is comfortable with half a percentage point if the labor market deteriorates further.
- Going forward, investors will focus on Fed Chair Jerome Powell’s speech at the upcoming Jackson Hole (JH) symposium, which will be held from August 22-24. Fed Powell is expected to provide cues about the interest rate cut path as inflation remains on track to return to the desired rate of 2% and the labor market is not overheated anymore.
Technical Forecast: US Dollar remains below 20-day EMA
The US Dollar continues to form lower highs and lower lows since the breakdown of the Rising Channel formation on a daily time frame. The declining 20-day Exponential Moving Average (EMA) near 103.50 suggests that the near-term trend is bearish.
The 14-day Relative Strength Index (RSI) oscillates in the 20.00-40.00 range, indicating that the momentum leans strongly to the downside.
Looking down, the March 8 low at 102.35 and the psychological level of 102.00 are immediate support levels for the US Dollar. On the upside, the August 8 high at 103.54 and the June 4 low of 104.00 will act as major resistance for Greenback bulls.
US Dollar FAQs
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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