US Dollar extends correction with bulls being pushed out of their positions
- The US Dollar eases on concerns that the current elevated position against other peers is unsustainable.
- Several tailwinds are emerging on the US Dollar from central banks of Europe and Asia.
- The US Dollar Index deepens losses in its turnaround since Wednesday and snaps below 106.00.
The US Dollar Index (DXY), which tracks the US Dollar against six major currencies, is facing issues with several parties screaming bloody murder on the stronger Greenback. This week, European Central Bank (ECB) President Christine Lagarde was the first to start mentioning that the ECB is concerned with the weaker Euro against the US Dollar (EUR/USD) and sees inflation trickling into the Eurozone on the back of that. Overnight, the message got picked up by the Bank of Japan (BoJ), where even an intervention could take place any time now.
Additionally, a joint statement was released overnight from the Finance Ministers of Japan and South Korea, addressing their weaker currencies to the US because of the Greenback’s recent outperformance. The substantial weaker Japanese Yen and Korean Won are causing issues for their central banks in their fight against inflation. The statement even mentions that a joint FX intervention could be needed in order to cool down current depreciations against the US Dollar, which would mean that the US Dollar Index could get slashed.
On the economic data front, the weekly Jobless Claims will be the main figures published on Thursday. Add three Fed speakers and the US Dollar could be trading either back above 106.00 or snap even 105.00 in case a perfect storm gets formed.
Daily digest market movers: Jobless Claims to confirm Dollar exceptionalism
- At 12:30 GMT:
- Weekly Jobless Claims data is set to be released:
- Initial Claims for the week ending April 12 are expected to increase to 215,000 from 211,000 seen a week before.
- Continuing Claims for the week ending April 5. The previous week's data was 1.817 million.
- Philadelphia Fed Manufacturing Survey for April is expected to decline to 1.5 from 3.2.
- At 14:00 GMT the Existing Home Sales data for March will be released. Figures are set to show a decrease to 4.20 million from 4.38 million in February.
- Three US Federal Reserve speakers on Thursday:
- At 13:05 GMT, Federal Reserve Governor Michelle Bowman delivers opening remarks at the New York Fed Regional Conference.
- Federal Reserve Bank of New York President John Williams will participate in a discussion at the Semafor World Economy Forum in Washington D.C. at 13:15 GMT.
- Federal Reserve Bank of Atlanta President Raphael Bostic will make two appearances on Thursday. Near 15:00 GMT in a Q&A about the US economic outlook and again at 21:45 GMT.
- It seems to be a global attempt from equity markets to end this sell rally. They are green across the board, from Asian equities over Europe to US equity futures, on average gaining near 0.50% with no real outperformers.
- According to the CME Group’s FedWatch Tool, expectations for a Fed pause in the May meeting are at 96%, while chances of a rate cut stand at 4%.
- The benchmark 10-year US Treasury Note trades around 4.58%, accelerating its retreat from Tuesday's high of 4.69%.
US Dollar Index Technical Analysis: Eye on the price
The US Dollar Index (DXY) is facing a sudden pile-up of headlines that goes against any US Dollar strength. That some central banks around the globe are suddenly expressing their disfavour of the strong US Dollar is creating a bit of a knee jerk reaction, with traders taking their profits for now. In the longer run, towards June and the summer, the wider rate differential should still favor the Greenback and should see the DXY Index heading higher again.
On the upside, the fresh Tuesday’s high at 106.52 is the level to beat. 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 at 105.88, a pivotal level since March 2023, is being proved at the time of writing. 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 104.17 and 103.91, 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.
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