The US Dollar (USD) trades broadly steady on Monday after suffering a wild ride on Friday, likely hurting intraday and short-term traders. The US Dollar Index (DXY) jumped significantly higher after a strong headline number in the US Jobs report, only to fully unwind that move and sink lower on the back of very poor Employment numbers in the Institute for Supply Management (ISM) Services PMI report. Adding to the swings caused by economic data releases, traders need to revalue the US Dollar taking into account increasing geopolitical tensions and mounting expectations of interest-rate cuts by the Federal Reserve (Fed).
On the economic front, a calm Monday is ahead with only Consumer Credit data for November due. The focus on credit numbers, loans and defaults is likely to grow in the coming months as several banks signal they are seeing more payment delinquencies. For this week, the main event will be the US inflation numbers on Thursday.
Bets on the US Dollar look split. On the one hand, traders place bets favoring the US Dollar due to increasing geopolitical tensions in the Middle East, with ongoing headlines over the Red Sea and Chinese weaponry found in Hamas storages by Israel. On the other side, traders see reasons for quick rate cuts by the Fed after the implosion of the ISM numbers last Friday. Expect geopolitics to take over control for now, as long as new headlines point to further heightened tensions.
In the DXY US Dollar Index, the first level on the upside is 103.00, which falls nearly in line with the descending trend line from the top of October 3 and December 8. Once broken and closed above there, the 200-day Simple Moving Average (SMA) at 103.43 comes into play. The 104.00 level might be a bit too far off, with 103.93 (55-day SMA) coming in as the next resistance on the upside.
To the downside, the rejection on the descending trendline is giving fuel to the Greenback bears for further downturn. The line in the sand here is 101.74, the floor which held halfway through December before breaking down in the last two weeks. In case the DXY snaps this level, expect to see a test at the low near 100.80.
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.