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- US Dollar declines despite strong housing data, dovish bets on the Fed weight
US Dollar declines despite strong housing data, dovish bets on the Fed weight
- US Dollar, observed a fall reaching its lowest value since March.
- Federal Reserve bets continue to lean in favor of a dovish stance, consequently impacting the USD.
- Strong Housing data could not prevent this decline.
On Thursday, the US Dollar measured by the DXY index saw an extension in its decline below 104.00, despite the strong housing data reported during the European session. Factors such as dovish bets on the Federal Reserve and lower US Treasury Yields are responsible for putting downward pressure on the USD.
The outlook for the US economy shows signs of disinflation, and markets are keeping confidence in a potential cut in September. The Federal Reserve officials continue to show hesitation in rushing to cuts and maintain a data-dependent approach but seem to put a cut in July on the table.
Daily digest market movers: DXY decline, housing data no help for the struggling USD
- Data concerning Housing Starts in June reported an improvement of 3%, amounting to 1.35 million units.
- According to the data unveiled by the US Census Bureau on Tuesday, this figure follows a decrease of 4.6% recorded in May.
- Building Permits showed a surge of 3.4% after a decline of 2.8% in the previous month.
- Thomas Barkin, the Richmond Federal Reserve President, suggested that the discussion at the July policy meeting will likely include whether it is still apt to describe inflation as elevated, as reported by Reuters.
- As per the CME FedWatch Tool, a rate cut in September seems to be priced in which pressured the USD down.
DXY Technical outlook: DXY's bearish outlook remains, a minor correction to the upside possible
Despite the decline, the DXY is grappling to regain the 104.00 area. Even though the daily indicators including Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are far below the 50-mark, pointing towards a near-oversold condition, the DXY could see a slight correction.
Strong supports lie at the 103.50 and 103.00 levels. However, the overall technical outlook remains bearish.
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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