US Dollar stabilizes amid sour market mood

The Dollar Index gains traction, hitting a fresh weekly high above 108.00 as market sentiment deteriorates.
US Durable Goods Orders disappointed, declining by 2.2% in December, missing expectations for a 0.8% increase.
Treasury Secretary Scott Bessent proposed gradual tariffs, but Trump pushed for higher, uniform rates, spooking investors.
Consumer Confidence in January fell to 104.1 from December's 109.5, reflecting growing concerns over the economic outlook.

The US Dollar Index (DXY), which measures the value of the US Dollar against a basket of currencies, extended its gains on Tuesday, consolidating above the psychological 108.00 level. Market sentiment soured after renewed concerns over tariffs and weak US economic data, including lower-than-expected Durable Goods Orders and declining Consumer Confidence. Despite these headwinds, the DXY managed to hold above its recent lows, signaling some resilience.

Daily digest market movers: US Dollar gains despite weak economic data

Treasury Secretary Scott Bessent proposed incremental tariffs on all US imports, starting at 2.5%, triggering risk aversion in markets.
President Trump countered Bessent’s suggestion, demanding significantly higher tariffs, further unsettling global financial markets.
The Conference Board's Consumer Confidence Index fell to 104.1 in January from 109.5 in December, indicating weaker sentiment.
Durable Goods Orders decreased by 2.2% in December, led by a 7.4% drop in transportation equipment, marking another economic setback.
Excluding transportation, new orders rose modestly by 0.3%, offering limited optimism amidst broader declines.
Concerns over overvalued AI shares contributed to a cautious market mood, limiting risk appetite and favoring the US Dollar.
Investors now flick their eyes to Wednesday’s Federal Reserve decision, where a hold is already priced in.

DXY technical outlook: Resilience above 108.00, correction risks linger

The Dollar Index showed resilience by reclaiming levels above 108.00, bolstered by renewed safe-haven demand. Technical indicators, however, paint a mixed picture. While the RSI remains below 50, hinting at weak momentum, the MACD shows growing flat bars, signaling sustained bearish pressure.

On the bright side, an upward correction could extend if the downward movement becomes overstretched. Immediate resistance lies at 108.50, while a failure to maintain 108.00 could see the DXY index revisiting support near 107.50.

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.