The US Dollar (USD) jumps higher against every G20 peer on Tuesday as US markets reopen after the Monday holiday. Many tailwinds are helping the Greenback to edge higher. The US appears to be the single green spot in terms of economic performance, with Goldman Sachs erasing its projection for a recession or hard landing as the last bank standing. Meanwhile, both China and Europe seem to be lagging behind. Recent Purchasing Managers Index (PMI) data suggested a slowdown in China’s services sector, while it showed a persisting contraction in Europe, adding to signs that the old continent’s economy could be on the verge of a hard landing.
There is a very light economic calendar this week. Nonetheless, every datapoint could add to the conviction that the US is actually the place to be in order to pursue that soft landing. One datapoint to watch will be Factory Orders at 14:00 GMT, which is expected to contract slightly and might cause some paring back of this US Dollar strength..
The US Dollar turns substantially higher against every main G20 currency, with several US indicators outpacing foreign indicators in terms of economic growth. It looks like the US and its Federal Reserve will be able to succeed in engineering a soft landing, whereas this is highly uncertain on the other side of the Atlantic Ocean. This makes the US Dollar more popular from an investment point of view.
The number to beat for the US Dollar Index (DXY) is 104.69 intraday, which is not far as the index already peaked at 104.66. So only a few cents to go and the DXY will be at a new six-month high. Next levels are at 105.23, the high of March 2022, making it an 18-month high. If the index reaches this last level, some resistance might kick in.
On the downside, the big 104.00 figure is vital to hold and keep the US Dollar Index sustained at these elevated levels. Some room lower, the 200-day Simple Moving Average (SMA) at 103.06 comes into play, which could bring substantially more weakness once the DXY starts trading below it. The double belt of support at 102.42, with both the 100-day and the 55-day SMA, are the last lines of defence before the US Dollar sees substantial and longer-term depreciation.
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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