US Dollar recovers modestly as markets await catalysts
- Recovering US yields supported the USD on Wednesday.
- The August NFP release is the most important reading for the Fed's policy decision.
- Current market pricing still sees 100 bps of easing by year-end.
The US Dollar, measured by the US Dollar Index (DXY), recovered modestly on Wednesday, after closing lower on Tuesday. The 10-year US Treasury yield held slightly above 3.80%, supporting the Greenback.
With no high-tier economic data releases scheduled for Wednesday, the US Dollar might remain in a narrow range.
Daily digest market movers: DXY shrugs off weak sentiment data on the back of hawkish bets
- On a quiet Wednesday, US Treasury yields supported the US Dollar with the 10-year rate above 3.80%
- Market pricing still anticipates 100 bps of easing by year-end, and the odds of a 50 bps cut in September remain at 25-35%.
- Strong August Nonfarm Payrolls figures next week could result in a 25 bps cut, while a weak reading may trigger a 50 bps cut.
- The index might continue sideways trading in the next few sessions, while markets await labor market data — the policy driver at the moment, according to the Fed.
Technical analysis DXY: Bearish momentum eases, index finds support around 101.00
The DXY index is currently hovering around its support levels and near its December lows. Market participants are waiting for new catalysts, resulting in sideways movement in the index over the past few sessions.
The Relative Strength Index (RSI) has moved out of oversold territory, while the Moving Average Convergence Divergence (MACD) indicator’s red bars are signaling a decline in selling pressure. Support levels lie at 100.50, 100.30 and 100.00, while resistance levels are located at 101.00, 101.50 and 101.80.
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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