US Dollar sees mild gains ahead of eventful week
- US Dollar Index shows steady momentum, holds above 106.00.
- Investors will eye bond auctions in the US as increased supply may fuel a hike in US yields.
- Along with mid-tier reports, the week’s highlight will be March’s Personal Consumption Expenditures (PCE) data.
The US Dollar Index (DXY) is mildly edging higher on Monday, currently trading at 106.20. The Greenback’s strength is driven by robust domestic economic and persistent inflation pressures, which fuels a more hawkish stance by the Federal Reserve (Fed). Despite a quiet start to the week, the DXY continues its resilience, with signs pointing toward a possible retest of the November highs near 107.10.
The US economy demonstrates enduring strength with increased yields and robust growth, aiding the US Dollar's steadiness. Some Fed officials started to consider a rate hike as they see no progress on inflation. As for now, markets are delaying the start of the easing cycle. This week, the US will release Personal Consumption Expenditures (PCE) and Durable Goods from March, Gross Domestic Product (GDP) estimations from Q1, and S&P PMIs from April, all of which will likely impact expectations on the next Fed decision.
Daily digest market movers: DXY holds steady as markets await drivers
- A hawkish turn from the Fed, coupled with additional US Treasury supply, could fuel additional upward movements in the US Treasury bond yields. This scenario can drive further Greenback gains following market adjustments to the Fed's actions.
- According to market expectations, investors assign a 15% probability of a rate cut in the coming June meeting. This chance increases to 45% for a July rate cut, and even a September rate cut is only priced at 85% odds.
- Upon examining the bond market, US Treasury bond yields are registering a slight decline. Specifically, the 2-year yield is seen at 4.97%, the 5-year yield at 4.64%, and the 10-year yield is slightly lower at 4.61%.
DXY technical analysis: DXY bulls struggle amid flat indicators
Despite the bullish momentum being halted, the DXY pair appears well-supported by its position above the 20,100 and 200-day Simple Moving Averages (SMAs), suggesting ongoing bullish sentiment.
The Relative Strength Index (RSI), being flat in positive territory, leaves room for possible bullish incursions. The lack of any definitive inclination may indicate an ongoing struggle between bulls and bears, yet retaining a latent potential for bullish behavior. Coinciding with the neutral RSI, the Moving Average Convergence Divergence (MACD) presenting flat green bars signals a sustained but flat buying momentum. Despite the occasional downturns, the prevalent green histogram highlights bulls’ resilience.
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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