US Dollar closes a losing week after economic data
- The US Dollar Index remains under pressure, testing the 107.50 level after a steep weekly decline of over 2%.
- S&P Global Composite PMI signals slower growth at 52.4 in January, compared to 55.4 in December.
- Markets now turn their attention to the next week’s Fed decision.
The US Dollar Index (DXY), which measures the value of the US Dollar against a basket of currencies, is experiencing sustained losses as it sinks below 107.50, its lowest level this week. US President Trump’s softer tone on proposed tariffs on China added to the currency’s bearish sentiment. Meanwhile, economic data continued to show mixed signals, leaving traders cautious.
Daily digest market movers: US Dollar slips after economic data and Trump remarks
- The S&P Global Composite PMI dropped significantly to 52.4 in January from 55.4 in December, showing a slower pace of expansion.
- Manufacturing PMI climbed to 50.1, exceeding forecasts of 49.6, reflecting a slight recovery in factory production activity.
- Services PMI decreased to 52.8 from 56.8, signaling weaker momentum in service sector growth.
- On Thursday, US Initial Jobless Claims rose to 223,000 for the week ending January 18, higher than the prior week’s revised 217,000 figure.
- Continuing Jobless Claims jumped by 46,000 to 1.899 million, highlighting increasing challenges in the labor market.
- Regarding the new administration’s plans, President Trump softens rhetoric on Chinese tariffs at Davos, suggesting some potential easing of trade tensions.
DXY technical outlook: Signs of deeper bearish momentum
The US Dollar Index (DXY) has dropped below the key 108.00 level, showing continued vulnerability to bearish momentum. The RSI remains under 50, signaling weaker relative strength, while MACD histogram bars deepen in negative territory, suggesting further downside.
The 20-day Simple Moving Average (SMA) around 108.00 now acts as a critical resistance level. A failure to reclaim this threshold could lead to additional losses with the next support zone seen near 107.00. Conversely, a recovery above 108.00 could stabilize the Greenback’s outlook and limit further declines.
Fed FAQs
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.
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.
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.
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
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
