US Dollar trades in the green after Monday’s last-minute turnaround
- The US Dollar trades in the green across the board through the European session.
- Traders are sending Greenback higher on a mixture of geopolitical fears and positive earnings.
- The US Dollar Index trades back above 105.00 after bulls were able to close in positive on Monday.
The US Dollar (USD) trades higher on Tuesday for a second consecutive day as several factors support the Greenback. Markets are pricing in again some risk premium as Israel looks set to start its ground invasion in Rafah, and Egypt has chored up its border control at its northern border with Gaza. Meanwhile substantial easing in the Australian Dollar (AUD/USD) and Japanese Yen (USD/JPY) adds to support for the Greenback.
On Tuesday, the US Redbook Index and the Economic Optimism measured by the TechnoMetrica Institute of Policy and Politics are the two main economic data points to be released. In this week's rather packed US Federal Reserve (Fed) speakers’ agenda, only Federal Reserve Bank of Minneapolis President Neel Kashkari is set to speak. Meanwhile, traders can digest the release of the Senior Loan Officer Opinion Survey (SLOOS) for the first quarter, which pointed out on Monday that tightened lending standards are still the norm while consumer delinquencies are picking up.
Daily digest market movers: Kashkari Fed heavyweight
- The United Kingdom was closed for a bank holiday on Monday and could see some catching up across several asset classes with London reopening on Tuesday.
- At 12:55 GMT, the Redbook Index for the week ending on May 3 will be released. The previous number was 5.5%.
- At 14:00 GMT, the TechnoMetrica Institute of Policy and Politics will release its Economic Optimism Survey for May. An uptick to 44.1 is expected from the previous reading of 43.2.
- Federal Reserve Bank of Minneapolis President Neel Kashkari will speak at around 15:30 GMT in a conversation at the Milken Institute 2024 Global Conference in Beverly Hills, California. Although Kashkari is a non-voter member this year, his comments have been market movers for the past few months.
- The US Department of the Treasury is set to auction 3-year Notes at 17:00 GMT.
- Finally, at 19:00 GMT, the Consumer Credit Change for March is set to be released. A further increase is expected to $15 billion from the $14.12 billion in the previous month.
- Japan is also back to open for business after a bank holiday. Overall, the positive close from the US equities overnight has spilt over into the Asian-Pacific session and is even rippling through into the European trading session, with green numbers across the board in all major indices.
- The CME Fedwatch Tool suggests a 91.3% probability that June will still see no change to the Federal Reserve's fed fund rate. Odds of a rate cut in July are also out of the cards, while for September the tool shows a 49.7% chance that rates will be 25 basis points lower than current levels.
- The benchmark 10-year US Treasury Note trades around 4.47%, in the middle of Monday’s range.
US Dollar Index Technical Analysis: Some help from across the Pacific
The US Dollar Index (DXY) ticks up on Tuesday after Dollar bulls were able to close above 105.00 on Monday after a correction move in recent days. This could be crucial for the rest of the week and could see the DXY tick up further from here. Although no real major known catalysts are foreseen for this week, a recovery back to 106.00 could be plausible if USD/JPY rallies further towards 157.00
On the upside, 105.52 (a pivotal level since April 11) needs to be recovered through a daily close above this level before targeting the April 16 high at 106.52 for a third time. 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 55-day and the 200-day Simple Moving Averages (SMAs) at 104.54 and 104.25, respectively, should provide ample support. If those levels are unable to hold, the 100-day SMA near 103.89 is the next best candidate.
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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