US Dollar gains some ground, still vulnerable
- The DXY index traded near 105.25 with 0.20% gains.
- US government bond yields are rising, rebounding from multi-week lows.
- The economic docket had no relevant high-tier reports to offer on Monday.
- Chair Powell will be on the wires on Wednesday.
The US Dollar (USD) traded flat on Monday, and the DXY index stands near 105.25, cushioned by a sour market mood and rising US bond yields. For the rest of the week, investors will put an eye on Chair Powell’s speech on Wednesday to get further clues on the next Federal Reserve meeting in December.
The labor market in the United States showed signs of cooling down after the October Nonfarm Payrolls report last Friday, which made investors practically take off the table an additional hike by the Fed in 2023. That being said, the bank will receive two additional inflation readings and a jobs report before the last meeting of the year. Incoming data will continue refining the model for market expectations.
Daily Digest Market Movers: US Dollar losses limited by recovering yields
- The US Dollar Index stands with 0.15% gains at 105.25.
- The Greenback saw sharp losses on Friday after the US Nonfarm Payrolls report.
- The US Bureau of Labor Statistics reported that the Nonfarm Payrolls from October came in lower than expected. The US added 150,000 jobs in October vs the expected 180,000 and decelerated from its revised previous figure of 297,000.
- The Unemployment Rate came in at 3.9% in October, above the expected 3.8% and accelerated compared to its previous reading of 3.8%.
- Average Hourly Earnings increased by 0.2% MoM but rose 4.1% YoY, higher than the expected 4% and its previous reading of 4.3%.
- After reaching multi-week lows, the 2-year rate increased to 4.90%, while the longer-term 5 and 10-year rates rose nearly 4.57% and 4.64%, which seems to be limiting the downside for the USD.
- According to the CME FedWatch Tool, the odds of a 25-basis-point hike in December are extremely low, around 10%.
Technical Analysis: US Dollar Index bears take a breather; more downside on the horizon
Based on the daily chart, the DXY Index maintains a neutral to bearish technical perspective, suggesting that despite gaining momentum, bulls are not yet in full control. The Relative Strength Index (RSI) shows a downward trend below its midline, while the Moving Average Convergence (MACD) histogram shows bigger red bars.
What gives the outlook neutrality is the index staying below the 20-day Simple Moving Average (SMA) but above the 100 and 200-day SMAs, indicating that the bulls still have the upper hand in the broader picture.
Support levels: 104.90, 104.70, 104.50.
Resistance levels: 105.50, 105.80, 106.00.
US Dollar FAQs
What is the US Dollar?
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.
How do the decisions of the Federal Reserve impact the US Dollar?
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.
What is Quantitative Easing and how does it influence the US Dollar?
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.
What is Quantitative Tightening and how does it influence the 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.
Author
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
