The US Dollar (USD) had a wild ride again on Thursday as the European Central Bank turned out to be a non-event. Rather the wild ride in the US equity markets thereafter made the US Dollar Index (DXY) pull back. The sell-off in US equities, with the Nasdaq leading the decline, saw investors flee to safe havens such as US bonds.
On the economic data front the focal point this Friday is the Personal Consumption Expenditures Index. Both the monthly change and the change against last year are both expected to further continue their decline. Any uptick might trigger a knee jerk reaction in the markets.
The US Dollar is trading in the green for this week, although a rejection on the topside on Thursday might see those weekly profits getting a touch smaller. The rejection came after the US Dollar Index (DXY) peaked on the back of a snooze fest ECB meeting. Do not expect a full paring back, though a very firm rally in the DXY is neither anticipated, ahead of the Federal Reserve meeting next week.
The DXY has consolidated above 106.00 and looks to keep stretching higher. Line in the sand is 106.84 that has triggered a rejection on the topside. Once broken through there, the high of October at 107.35 comes into play for a retest.
On the downside, the recent resistance at 105.88 did not do a good job supporting any downturn and now completely has lost its importance. Instead, look for 105.12, which is a pivotal historic line and almost falls in line with the 55-day Simple Moving Average (SMA) to keep the DXY above 105.00, and which worked already quite ahead of it on Tuesday. Should this level fail to do the trick, a big air pocket could develop and see the DXY drop to 103.74, near the 100-day SMA, before finding ample support.
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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