98.75 support tested; US Dollar Index under pressure amid US debt buyback plan
- The USD Index languishes just above three-month lows at 98.75 after dropping 0.86% on Wednesday.
- US Treasury's plan to boost long-term bond purchases sent the Greenback tumbling across the board.
- Bearish pressure remains high, but the oversold RSIs hint at an overstretched cycle,
The US Dollar (USD) took a beating on Wednesday after US Treasury Secretary Scott Bessent announced a plan to buy back long-term government debt to ease Bond yields. The USD Index (DXY), which measures the value of the Dollar against a basket of six majors, dropped nearly 0.9% on the day to find support at the three-month low of 98.75, which is being tested at the time of writing.
Deutsche Bank's Analyst George Saravelos affirmed that the initiative amounts to a “soft-form financial repression policy aimed at containing the long-end of the US yield curve, and this was negative for the Dollar.” Saravelos argues that “if the market price of US Treasuries isn’t ‘allowed’ to adjust lower, then the foreign exchange price of Treasuries owned by foreign investors has to adjust via a weaker Dollar,” effectively shifting the adjustment burden from bond valuations to the currency.
This news clouded the release of hawkishly leaning minutes of the Federal Reserve's July meeting, which reflected policymakers' commitment to hike interest rates in the near-term, unless inflationary pressures abate.
Technical Analysis: Oversold RSIs hint at an overextended cycle
Dollar Index Spot trades at 98.75, extending a bearish near-term bias after Wednesday's impulsive decline. Momentum indicators are deep into bearish territory, although the Relative Strength Index (14) has reached oversold levels in most timeframes, which suggests that some consolidation or even a bullish correction is on the cards.
Bears have been halted above the late May lows, at 98.75, with upside attempts capped so far. Below here, there are no clear support levels until the bottom of the April and May trading range, in the 97.65-97.80 area.
Upside attempts, on the contrary, are likely to be tested at a previous support area of 99.30 (August 16 lows) ahead of Wednesday's high, near 99.70 and the top of the last two weeks' trading range, right above the 100.00 psychological level.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
US Dollar FAQs
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.
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.
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.
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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