US Dollar outperforms its rivals as market mood sours


  • US Dollar manages to hold its ground against its major rivals.
  • US Dollar Index continues to stretch higher above 104.00 on Tuesday.
  • ISM Services PMI report for May showed a loss of momentum in the service sector.

The US Dollar (USD) lost its strength in the American session on Monday but didn't have a difficult time on finding demand early Tuesday. The US Dollar Index (DXY), which tracks the USD's valuation against a basket of six major currencies, stays in positive territory above 104.00 as investors look for the next catalyst during the Federal Reserve's (Fed) blackout period. 

The monthly data published by the ISM showed on Monday that the business activity in the US service sector continued to expand in May, albeit at a softer pace than it did in April. The ISM Services PMI declined to 50.3 in May from 51.9 in April and missed the market expectation of 51.5.  

Daily digest market movers: US Dollar benefits from risk aversion

  • Major equity indexes in the US opened in negative territory on Tuesday. After the opening bell, the S&P 500 and the Nasdaq Composite indexes were down 0.35% and 0.2%, respectively.
  • Further details of the ISM PMI report revealed that the Prices Paid Index edged lower to 56.2 from 59.6 and the Employment Index dropped to 49.2 from 50.8.
  • Commenting on the data, "there has been a pullback in the rate of growth for the services sector," noted Anthony Nieves, Chair of the Institute for Supply Management (ISM) Services Business Survey Committee. "This is due mostly to the decrease in employment and continued improvements in delivery times (resulting in a decrease in the Supplier Deliveries Index) and capacity, which are in many ways a product of sluggish demand."
  • The US Census Bureau announced on Monday that Factory Orders rose 0.4% in April following the 0.9% increase recorded in March.  
  • According to the CME Group FedWatch Tool, markets are pricing in a more than 80% probability of the Fed leaving its policy rate unchanged at the upcoming meeting.
  • The monthly data published by the US Bureau of Labor Statistics (BLS) showed on Friday that Nonfarm Payrolls rose 339,000 in May. This reading surpassed the market expectation of 190,000 by a wide margin. April's reading of 253,000 also got revised higher to 294,000. 
  • Underlying details of the labor market report revealed that the Unemployment Rate climbed to 3.7% from 3.4% in the same period. The Labor Force Participation rate remained unchanged at 62.6%, while annual wage inflation, as measured by the change in Average Hourly Earnings, edged lower to 4.3% from 4.4%.
  • Commenting on the US jobs report, "is the US economy experiencing a soft landing? According to the latest Nonfarm Payrolls, the job market is slowing down to a "Goldilocks level" – not too hot nor too cold," said FXStreet Analyst Yohay Elam. "For markets, it means ongoing growth but with lower inflation and interest rates. For the US Dollar, it means the path of least resistance is down."
  • "There's likely enough pockets of softness in this report for the FOMC to pass on raising rates at the next meeting, though another strong payrolls gain in June, coupled with another disappointing inflation report, could set the stage for a rate increase in July," economists at the Bank of Montreal said regarding the potential impact of the labor data on the Fed's policy outlook.

Technical analysis: US Dollar Index stays bullish on Tuesday

The US Dollar Index (DXY) trades above 104.00, where the Fibonacci 23.6% retracement of the November-February downtrend is located. In the meantime, the Relative Strength Index (RSI) indicator on the daily chart stays comfortably above 50, suggesting that buyers look to remain in the driver's seat. 

104.50 (static level) aligns as first resistance for DXY ahead of 105.00 (psychological level). A daily close above the latter could bring in additional buyers and open the door for an extended rebound toward 105.60 (Fibonacci 38.2% retracement, 200-day Simple Moving Average (SMA)).

On the downside, bearish pressure could increase if DXY closes the day below 104.00. In that scenario, 103.50 (static level) could be seen as initial support before 103.00 (100-day SMA).

How is US Dollar correlated with US stock markets?

Stock markets in the US are likely to turn bearish if the Federal Reserve goes into a tightening cycle to battle rising inflation. Higher interest rates will ramp up the cost of borrowing and weigh on business investment. In that scenario, investors are likely to refrain from taking on high-risk, high-return positions. As a result of risk aversion and tight monetary policy, the US Dollar Index (DXY) should rise while the broad S&P 500 Index declines, revealing an inverse correlation

During times of monetary loosening via lower interest rates and quantitative easing to ramp up economic activity, investors are likely to bet on assets that are expected to deliver higher returns, such as shares of technology companies. The Nasdaq Composite is a technology-heavy index and it is expected to outperform other major equity indexes in such a period. On the other hand, the US Dollar Index should turn bearish due to the rising money supply and the weakening safe-haven demand.

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Recommended content


Recommended content

Editors’ Picks

EUR/USD keeps range below 1.0750 ahead of US data, Fedspeak

EUR/USD keeps range below 1.0750 ahead of US data, Fedspeak

EUR/USD is consolidating its mild recovery below 1.0750 in the European session on Tuesday. Risk flows remain and exert additional downside pressure on the US Dollar while Euro traders reposition ahead of Sunday's French election. Mid-tier US data, Fedspeak are in focus.

EUR/USD News

GBP/USD recovers to 1.2700 as US Dollar weakness extends

GBP/USD recovers to 1.2700 as US Dollar weakness extends

GBP/USD is recovering to test 1.2700 in the European morning on Tuesday. Extended US Dollar weakness due to improved market mood, aids the pair's latest uptick. Traders look to the US sentiment data and Fed speeches for further impetus, as the UK calendar remains data-quiet. 

GBP/USD News

Gold moves within familiar territory as traders await further cues

Gold moves within familiar territory as traders await further cues

Gold (XAU/USD) trades in familiar territory in the $2,320s on Tuesday, amid a subdued market mood after a mixed session for Asian stocks and investor loss of appetite for tech stocks on Monday. 

Gold News

Bitcoin breaks below descending wedge, finding support on key level

Bitcoin breaks below descending wedge, finding support on key level

Bitcoin spot ETFs record a $174.5 million outflow on Monday, marking seven consecutive days of continuous decline. Mt.Gox announces Bitcoin and Bitcoin Cash repayment to creditors in July.

Read more

Canada CPI Preview: Inflation expected to continue easing in May

Canada CPI Preview: Inflation expected to continue easing in May

The Canadian CPI is expected to rise at an annual rate of 2.6% in May, a tad slower than a 2.7% increase in April. On a monthly basis, the CPI inflation is seen easing to 0.3% in the same period after April’s 0.5% growth. 

Read more

Forex MAJORS

Cryptocurrencies

Signatures