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- US Dollar scores mild gains in quiet Tuesday
US Dollar scores mild gains in quiet Tuesday
- There won’t be any high-level US reports due this week.
- Fed officials aren’t providing any new insights on the bank’s next movements.
- The next highlight will be next Wednesday when the US releases April’s CPI figures.
The US Dollar Index (DXY) is trading at 105, registering mild gains. Market dynamics are currently influenced by Federal Reserve (Fed) Chair Jerome Powell's cautious remarks regarding the unpredictable trajectory of inflation despite an easing trend in recent times. As well as Powell, the Fed officials flagged concerns regarding sticky inflation, despite the long implementation of restrictive monetary policies. Unless any of the Fed speakers kick the table, there won’t be any big movements this week for the USD.
Investors got spooked on Friday by the soft labor market report and rushed to bet on sooner rate cuts. However, the US economy seems to be resilient, and the pace of the USD will be dictated by incoming data.
Daily digest market movers: DXY is mildly up, dovish bets and lower yields may limit upside
- Post-Fed policy meeting, expectations for Fed easing have dropped, keeping the odds for a June cut steady at around 10%. This indicates a prevalent trust in the strength of the US economy.
- Fed officials align with Powell's view, projecting a skeptical perspective for any imminent rate reduction. Market odds suggest varied easing possibilities - 10% for a June cut, 35% for July, and 85% for September.
- US Treasury bond yields recorded a dip with the 2-year yield at 4.80%, the 5-year yield at 4.44%, and the 10-year yield at 4.43%, which may limit the upside for the USD.
DXY technical analysis: DXY presents battle with bears struggling to hold command
On the daily chart, the Relative Strength Index’s (RSI) positive slope indicates the presence of upward momentum, albeit in negative territory. This suggests that bears currently have control, though buyers are fighting back. The Moving Average Convergence Divergence (MACD) shows a reduction in red bars, further hinting at sellers losing steam and a potential turn in momentum towards the upside.
Meanwhile, the recent price action seen on the charts shows bulls working toward recovery. The DXY is positioned below the 20-day Simple Moving Average (SMA), indicating recent bearish pressure. However, it remains above the 100 and 200-day SMAs. This positioning suggests that despite recent selling bouts, the long-term sentiment remains in favor of further upside.
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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