US Dollar looks for five-day winning streak on safe-haven inflows, diverging rate outlook
- The US Dollar enters a fifth straight day of gains against most major peers.
- Markets are awaiting a change in stance from Fed Chairman Powell on Tuesday.
- The US Dollar Index remains steady above 106.00 targeting now the 2023’s high.
The US Dollar Index (DXY) rallies forward as the King Dollar gains ground against several major peers. The Greenback is enjoying the change in narrative on the rate differential since last week, which got bigger against other currencies in favor of the US Dollar. Additional tailwind comes from Israel, which vowed yet to retaliate against Iran despite diplomatic efforts to ease tensions in the Middle East, now really putting the region back on the brink of war.
On the economic data front, the data points will not really move the needle for the US Dollar on Tuesday. Main event comes in the form of three Federal Reserve (Fed) speakers, with Fed Chairman Jerome Powell being the most important. Powell’s speech could be the game changer, as any change in wording on rate cut expectations or outlook from the Fed Chairman could spark either another leg higher for the Greenback or start a severe pullback.
Daily digest market movers: Forget about the data today
- At 12:30 GMT some Housing data for March is set to be released:
- Building Permits are expected to decrease to 1.514 million from 1.524 million.
- Housing starts are expected to decline to 1.48 million from 1.521 million.
- At 12:55 GMT the year-over-year Redbook Index for the week ending April 12 will be released. The index was at 5.4% the week of April 5.
- At 13:15 GMT the Fed will publish the Capacity and Industrial Production numbers for March:
- Capacity Utilization will head to 78.5% from 78.3%, according to expectations.
- Industrial Production is seen heading to 0.4% from 0.1%.
- A slew of Fed speakers that will try to guide the markets:
- At 13:00 GMT, Federal Reserve Vice Chair Philip Jefferson is due to deliver a keynote speech at the International Research Forum on Monetary Policy in Washington, DC.
- Around 16:30 GMT Federal Reserve Bank of New York President John Williams will moderate a conversation at the Economy Club of New York.
- Near 17:15 GMT, Federal Reserve Chair Jerome Powell will enter a discussion panel with the Bank of Canada governor Tiff Macklem at the Washington Forum.
- Equities nosedive lower after the sharp Monday’s drop, where most of major US indexes lost their initial gains to close more than 1% lower. On Tuesday, both Europe and Asia equities slid lower by more than 1%, while US futures are looking bleak ahead of the US opening bell.
- According to the CME Group’s FedWatch Tool, expectations for a Fed pause in the May meeting are at 98.2%, while chances of a rate cut stand at 1.8%. Although there are calls for a rate hike, those are not being represented in the CME futures yet, and could add to substantial more US Dollar strength once the possibility starts to be priced in as a possibility.
- The benchmark 10-year US Treasury Note trades around 4.64%. Further move upwards could even point to expectations of another rate hike before the easing cycle will start to take place.
US Dollar Index Technical Analysis: Squeeze out the weak
The US Dollar Index (DXY) is rolling through markets and clearly the division between weak and strong currencies becomes very more clear. The Greenback looks to be the ultimate gainer while Europe and China look very bleak in terms of rates and keeping them steady for longer. WIth these main currencies set to devalue substantially further in the coming weeks and months, the end of the King Dollar does not look to be taking place anytime soon, as long as US data keeps outperforming. Bets on a weaker US Dollar will get squeezed out time after time
On the upside, the first level for the DXY is the November 10 high at 106.01, just above the 106.00 figure, which got taken out overnight. Further up and above the 107.00 round level, the DXY Index could meet resistance at 107.35, the October 3 high.
On the downside, the first important level is 105.88, a pivotal level since March 2023 and which proved its importance on Monday holding support. Further down, 105.12 and 104.60 should also act as a support, ahead of the region with both the 55-day and the 200-day Simple Moving Averages (SMAs) at 103.97 and 103.84, respectively.
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.
Related Articles
