US Dollar sees mild gains amid remarks from Fed speakers
- In a quiet week, Fed’s hawks are keeping the US Dollar afloat.
- Fed officials ask for patience to let monetary policy do its job.
- US Treasury bond yields recover somewhat on Wednesday.
The US Dollar Index (DXY) is currently trading with mild gains at 105.45. This gain can be partially attributed to the cautious remarks of members of the Federal Reserve (Fed), who highlighted that rates will be kept high as long as they need to be to bring down inflation. Other than that, there won’t be any relevant highlight from the US economy until next week when the US will release Consumer Price Index (CPI) data from April.
The US economy faces uncertainty with Fed Chair Jerome Powell acknowledging inflation persists uncomfortably high despite easing significantly in the past year. The Fed's stance has turned hawkish as the latest weak Nonfarm Payrolls report seems to have not convinced the bank that the job is done yet. However, if data continues coming in soft, the cuts will eventually come.
Daily digest market movers: DXY holds its ground on hawkish Fed bets, higher US Treasury yields
- Hawkish sentiments are emerging inside the Fed, casting doubt over the neutral rate level and pointing out potential prompts to adjust interest rates if needed, such as a resilient housing market and ascending inflation.
- Projections suggest a budding shift, indicating that the persistent strength of the US economy might elevate the median neutral rate in the future.
- Markets predict only a 10% probability of a rate cut at June's meeting. These probabilities reduce slightly over time with a projected 30% probability for a cut in July (down from 40%) and an 80% chance for September (down from 90%). A rate cut in November, however, remains fully priced in.
- US Treasury bond yields depict a scattered picture but are higher overall. The 2-year yield trades at 4.82%, mildly down while the yields for both 5-year and 10-year bonds, residing at 4.48% and 4.47%, respectively, show a slight upward inclination.
DXY technical analysis: DXY struggles amid reduced buying momentum, swing inclined toward sellers in the short term
The indicators on the daily chart reflect a rather unsettled scenario for the Dollar Index. The Relative Strength Index (RSI) is lying flat in positive territory, indicating a lack of clear momentum in either direction. Moreover, the Moving Average Convergence Divergence (MACD) exhibits flat red bars, which shows that sellers remain steady.
In addition, the presence of the DXY beneath the 20-day Simple Moving Average (SMA) suggests that bears have managed some control, with the currency struggling to regain ground. Despite the sellers' efforts, the Index remains above the 100 and 200-day Simple Moving Averages (SMAs), implying that bulls maintain dominance in the overall trend.
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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