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US Dollar benefits from risk aversion as focus shifts to debt ceiling talks

  • US Dollar shook off the selling pressure in the American session on Tuesday..
  • US Dollar Index manages to hold above 102.00 following Monday's slide.
  • Headlines surrounding debt ceiling talks could impact USD valuation.

The US Dollar (USD) manages to limit its losses in the second half of the day on Tuesday as investors assess the latest macroeconomic data releases from the United States (US) and comments from Federal Reserve (Fed) officials. The US Dollar Index (DXY), which tracks the USD's performance against a basket of six major currencies, registered small losses on Monday and extended its slide below 102.50 on Tuesday. With markets adopting a cautious stance, however, the DXY retraced the earlier decline in the American session.

US President Joe Biden will meet with Republican House of Representatives Speaker Kevin McCarthy and three other top congressional leaders at 19:00 GMT for the next round of debt limit negotiations.

Daily digest market movers: US Dollar edges higher amid risk aversion

  • The US Census Bureau announced on Tuesday that Retail Sales in the United States rose 0.4% in April to $686.1 billion. This reading followed the 0.7% (revised from -0.6%) decrease recorded in March and came in below the market expectation for an increase of 0.7%.
  • Industrial Production in the US expanded by 0.5% in April, compared to analysts' estimate of 0%.
  • Cleveland Federal Reserve President Loretta Mester said on Tuesday that she doesn't think that they are at a point to hold the policy rate unchanged. Mester, however, further noted that they will assess the data until the next policy meeting in four weeks.
  • The data from the US showed on Monday that the headline General Business Conditions Index of the Federal Reserve Bank of New York's Empire State Manufacturing survey slumped to -31.8 in May from 1.8 in April.
  • In an interview with CNBC on Monday, Chicago Federal Reserve Bank President Austan Goolsbee said that they need to monitor more than normal data sets and be attuned to credit conditions when deciding on policy.
  • Minneapolis Federal Reserve Bank President Neel Kashkari reiterated that inflation is "much too high" and that they have a long way to go before reaching the inflation goal.
  • Atlanta Federal Reserve President Raphael Bostic told Bloomberg on Monday that, if he were voting now, he would vote to hold rates in June. However, he warned that he has to keep a possible rate hike on the table.
  • US House Speaker Kevin McCarthy told reporters that Congressional and White House negotiators were still far apart in talks to raise the debt ceiling to avoid a default.
  • Retail Sales in the US are forecast to rise 0.7% in April following the 0.6% decrease recorded in March. Industrial Production is expected to stay unchanged on a monthly basis.
  • "If Congress fails to increase the debt limit, it would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests," warned US Treasury Secretary Janet Yellen.
  • Yellen further noted that a US default would result in an "unprecedented economic and financial storm" that could trigger an income shock and lead to recession.
  • Following a two-day rally, the benchmark 10-year US Treasury bond yield stays in positive territory above 3.5%.
  • Wall Street's main indexes recorded small gains on Monday. After the opening bell on Tuesday, the Dow Jones Industrial turned south and was last seen losing 0.65% on a daily basis.

US Dollar Index technical analysis: 102.50 is a key pivot level

The US Dollar Index (DXY) closed slightly below the 50-day Simple Moving Average (SMA) on Monday, currently located at around 102.50. Although the DXY rose above that level, it needs to make a daily close to convince buyers. In the meantime, the Relative Strength Index (RSI) indicator on the daily chart holds slightly above 50, highlighting sellers' hesitancy.

On the downside, 102.00 (psychological level, static level) aligns as first technical support ahead of 101.75 (20-day SMA). A daily close below the latter could open the door for an extended slide toward 101.00 (psychological level, static level).

In case the DXY manages to stabilize above 102.50, it is likely to face strong resistance at 103.00 (psychological level, 100-day SMA) before targeting 103.60 (static level from February).

What is US Dollar Index (DXY)?

The US Dollar Index, also known as DXY or USDX, is a benchmark index that was established by the US Federal Reserve in 1973. DXY is widely used as a tool measuring the US Dollar (USD) value in global markets. The index is calculated by measuring the US Dollar’s performance against a basket of six foreign currencies, the Euro, the Japanese Yen (JPY), Swedish Krona (SEK), the British Pound (GBP), the Swiss Franc (CHF) and the Canadian Dollar (CAD).

With 57.6%, the Euro has the biggest weight in the index followed by the JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%), and CHF (3.6%). Hence, a sharp decline in the EUR/USD pair could help the US Dollar Index rise even if the US Dollar weakens against some of the other currencies in the basket. 

Author

Eren Sengezer

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.

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