US Dollar remains on track to post strong weekly gains
- US Dollar continues to gather strength on Friday.
- US Dollar Index climbed to a fresh 9-day high above 101.00.
- US economic docket will not feature any high-tier data releases ahead of the weekend.
Following a quiet Asian session on Friday, the US Dollar found demand in the European session. The US Dollar Index (DXY), which tracks the USD's valuation against a basket of six major currencies, extended its weekly uptrend and rose above 101.00 for the first time in over a week.
The USD captured capital outflows out of the Japanese Yen early Friday, helping the DXY gaining traction. Citing five sources familiar with the matter, Reuters reported on Friday that the Bank of Japan was leaning toward maintaining its yield curve control (YCC) strategy at next Friday's policy meeting. Dovish BoJ expectations triggered a JPY selloff and provided a boost to the USD.
The US economic docket will not offer any high-impact data releases that could potentially impact the USD's performance against its rivals ahead of the weekend. Investors could also refrain from taking large positions while preparing for next week's highly anticipated Federal Reserve policy announcements.
Daily digest market movers: US Dollar preserves its strength on Friday
- The number of first time application for unemployment benefits in the US declined to 228,000 in the week ending July 15, the US Department of Labor announce on Thursday. This reading came in much below the market expectation of 242,000 and lifted the US Dollar Index. Other data showed that Existing Home Sales declined 3.3% in June following the 0.2% growth in May.
- Wall Street's main indexes opened mixed on Friday. At the time of press, the Nasdaq Composite was up 0.3%, while the Dow Jones Industrial Average was losing 0.1%.
- The Wall Street Journal reported early Thursday that the United States banned 14 Iraqi banks from using the USD in transactions on suspicion of these banks funnelling USDs to Iran.
- China's ambassador to Washington, Xie Feng, said late Wednesday that China will respond if the US were to impose more curbs on the country's chip sector.
- The Federal Reserve Bank of Philadelphia's Manufacturing Index inched slightly higher to -13.5 in July from -13.7 in June.
- The Federal Reserve Bank of Atlanta's GDPNow model forecasts a 2.4% US GDP growth in the second quarter.
- The monthly data published by the US Census Bureau showed Wednesday that Housing Starts declined 8% on a monthly basis in June, following the 15.7% increase (revised from +21.7%) recorded in May. In the same period, Building Permits fell 3.7%, swinging from May's 5.6% increase.
- Retail Sales in the US rose 0.2% in June to $689.5 billion, the US Census Bureau reported on Tuesday. The 0.3% increase recorded in May had been forecast to reach 0.5% in June, but the data came in far below. Retail Sales Ex-Autos increased 0.2% in the same period, coming in also slightly below the market expectation of 0.3%.
- Industrial Production in the US contracted 0.5% for the second straight month in June, data from the US Federal Reserve's showed Tuesday.
- US Treasury Secretary Janet Yellen told Bloomberg on Monday that there is a good chance that the Biden administration will go ahead with outbound investment controls on China.
- The US Dollar weakened significantly last week as soft inflation data revived expectations about the Federal Reserve reaching the terminal rate with a 25-basis-point (bps) rate hike in July.
- The Consumer Price Index (CPI) in the US rose 3% on a yearly basis in June, following the 4% increase recorded in May. The annual Producer Price Index (PPI) edged 0.1% higher in the same period.
- Commenting on the USD's outlook: "In case of an increasingly rapid fall in inflation and weakening economic data, the market might increasingly rely on key rates not remaining at high levels for a long time, whereas rate cuts before the end of the year are becoming increasingly likely," said Antje Praefcke, FX Analyst at Commerzbank. "That would cause the USD to ease further."
Technical analysis: US Dollar Index eyes an extended rebound
The Relative Strength Index (RSI) indicator on the daily chart rose above 40 early Friday, suggesting that the US Dollar Index (DXY) has more room on the upside before turning neutral. On a weekly basis, the DXY is up more than 1% and looks to snap a two-week losing streak.
101.00 (former support, static level) aligns as a key pivot point for DXY. A weekly close above that level could open the door for an extended rebound toward 101.50 (static level), 101.80 (20-day Simple Moving Average) and 102.00 (psychological level).
On the downside, 100.50 (static level) forms interim support before 100.00 (psychological level). If the DXY index makes a daily close below the latter, 99.20 (static level from March 2022) could be seen as next support.
Fed FAQs
What does the Federal Reserve do, how does it impact the US Dollar?
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
How often does the Fed hold monetary policy meetings?
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
What is Quantitative Easing (QE) and how does it impact USD?
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
What is Quantitative Tightening (QT) and how does it impact the US Dollar?
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Author
Eren Sengezer
FXStreet
As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.
