US Dollar rebounds as selloff in bank shares weigh on sentiment

US Dollar suffered heavy losses against its rivals on Wednesday.
Markets expect the Fed to pause its tightening cycle in June following the latest policy decisions.
US Dollar Index holds above 101.00 but the bearish bias stays intact.

The US Dollar (USD) continued to weaken against its rivals late Wednesday and the US Dollar Index (DXY) closed the second straight day in negative territory. The USD manages to erase some of its losses on Thursday as safe-haven flows dominate the action following another bout of selloff in the regional bank shares.

Citing two people familiar with the matter, the Financial Times reported that Western Alliance was exploring options, including a potential sale of all or part of its business. Meanwhile, shares of PacWest Bancorp hit a record low following a more than 40% decline after the lender announced that it was in talks with potential partners about strategic asset sales. In early trading, other regional lenders, such as KeCorp amd Valley national Bancorp, were down between 3% and 7%.

Although the Fed raised its policy rate by 25 basis points (bps) to the range of 5-5.25% on Thursday as expected, it dropped language saying that it "anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time." With the immediate reaction to this dovish tone, the USD selloff picked up steam in the late American session on Wednesday.

In the post-meeting press conference, FOMC Chairman Jerome Powell refrained from confirming a pause in rate hikes in June when asked about it. Moreover, Powell noted that it would not be appropriate to cut rates this year given their view that it will take some time for inflation to come down.

Nevertheless, these comments failed to convince markets. According to the CME Group FedWatch Tool, the probability of the US central bank raising its policy rate one more time in June is less than 5%, compared to nearly 40% just a week ago.

Daily digest market movers: US Dollar finds some demand as a safer alternative

The benchmark 10-year US Treasury bond yield fell nearly 7% in the previous two days and broke below 3.4%, reflecting the negative impact of dovish Fed bets.
Unit Labor Costs in the US climbed to 6.3% in the first quarter from 3.3%. This reading surpassed the market expectation of 5.5%.
The US Department of Labor reported that there were 242,000 initial Jobless Claims last week, up from 229,000 in the previous week.
Wall Street's main indexes opened in negative territory after closing in the red on Wednesday. The Dow Jones Industrial Average was down nearly 1% after the opening bell.
The ECB raised its key rates by 25 bps following the May policy meeting.
On Friday, the US Bureau of Labor Statistics' April jobs report will be watched closely by market participants. Nonfarm Payrolls (NFP) in the US are forecast to rise by 179,000 in April.
Previewing the April labor market data, “high-frequency data suggest the pace of job creation is likely to take a step down in April, with payrolls set to advance at a sub-200k pace for the first time since 2020," said TD Securities analysts. "Our interpretation of the daily Homebase series, which tracks small-business payrolls, suggests employment rose 150k.”
The data published by Automatic Data Processing (ADP) showed on Wednesday that private sector employment in the US rose by 296,000 in April, surpassing the market expectation for an increase of 148,000 by a wide margin.
Commenting on the survey's findings, “employers are hiring aggressively while holding pay gains in check as workers come off the sidelines. Our data also shows fewer people are switching jobs,” said Nela Richardson, chief economist, ADP.
The ISM Services PMI improved modestly to 51.9 in April from 51.2 in March. This reading revealed that the business activity in the service sector continued to expand at a soft pace. The Prices Paid Index, the input inflation component, ticked up to 59.6 from 59.5 and the Employment Index declined to 50.8 from 51.3.
The data published by the US Census Bureau revealed on Tuesday that new orders for manufactured goods, Factory Orders, increased $4.9 billion, or by 0.9%, to $539 billion in March."
The BLS announced that the number of job openings on the last business day of March stood at 9.59 million, compared to 9.97 million in February. This reading came in below the market expectation of 9.77 million.
The ISM Manufacturing PMI improved slightly to 47.1 in April from 46.3 in March. This reading showed that the contraction in the manufacturing sector's activity continued, albeit at a softer pace.
The ISM's survey further revealed that the Price Paid sub-index, the input inflation component, climbed to 53.2 from 49.2, playing into the hawkish Fed narrative.
US regulators seized First Republic Bank and agreed to sell a majority of its assets to JPMorgan Chase & Co. Last week, the bank reported that there were more than $100 billion of deposit outflows in the first quarter.
In the first half of the trading session on Tuesday, PacWest Bancorp shares were down more than 30%, while Western Alliance Bancorporation stocks were losing over 20%. The financial-heavy Dow Jones Industrial Average lost more than 1% on the day.
The European Central Bank (ECB) noted in its Bank Lending Survey that a net 38% of Eurozone banks reported a fall in demand for credit from companies in the first quarter of the year.

Technical analysis: US Dollar Index remains bearish despite latest rebound

The Relative Strength Index (RSI) indicator on the daily chart for the US Dollar Index (DXY) retreated below 50 on Wednesday. Additionally, the DXY continues to fluctuate below the 20-day Simple Moving Average (SMA), which is currently located at 101.80, reflecting the bearish shift in the short-term technical outlook.

On the downside, the DXY could face first support at 101.00 (static level, psychological level) before bears could aim for the key 100.00 psychological level.

101.80 (20-day SMA) aligns as interim resistance. With a daily close above that level, the DXY could extend its rebound toward 102.50 (static level) and 103.00 (50-day SMA, 100-day SMA).

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.

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