US Dollar holds gains following another increase in Treasury yields

Source Fxstreet
May 30, 2024 10:28
  • The US Dollar trades substantially stronger against most major G20 peers.
  • Markets are stuck in a risk-off mood, with equities deep in red during the Asia-Pacific session.
  • The US Dollar retreats slightly after rallying above 105.00.

The US Dollar (USD) eases slightly on Thursday after the strong rally seen on Wednesday, which led the DXY US Dollar Index to break above the 105.00 mark. The Greenback is strengthening as a well-known quote from Friends sitcom must come to mind to traders that are assessing the current market movements: “Well Judy you did it, she’s finally full!”. The bond markets are indeed full, full of US debt and investors gave signs to have had enough, sending yields higher in order to get all the debt allocated. The recent rise in Treasury yields is supporting the Greenback as the rate differential balance against other currencies widens. 

On the economic data front, a busy economic calendar is ahead, with a pivotal data point to be released: the US Gross Domestic Product. Even though it is the second estimate for Q1, any significant revision from the preliminary reading could rattle markets. Add to that the weekly Jobless Claims numbers and a market moving Thursday looks to be in the making. 

Daily digest market movers: Look at the PCE part in GDP

  • 12:30 GMT is the time when most important data will be released:
    • Weekly Jobless Claims:
      • Initial Jobless Claims are expected to tick up to 218,000 from 215,000.
      • Continuing Jobless Claims are seen rising to 1.800 million from 1.794 million.
    • The second estimate of the US Gross Domestic Product numbers for the first quarter:
      • The Price Index is expected to remain stable at 3.1%.
      • Headline GDP is seen heading to 1.3% from the 1.6% expansion initially estimated.
      • The headline Personal Consumption Expenditures (PCE) stood at 3.4% in the preliminary estimate, d.
      • The core PCE is seen stable at 3.7%.
    • The Goods Trade deficit for April is expected to narrow from $92.5 billion to $91.8 billion. 
    • Wholesale Inventories for April are expected to fall by a marginal 0.1%, less than the 0.4% decline seen in March.
  • At 14:00 GMT, Pending Home Sales data is due to be released. Seeing the recent string of housing data, a negative print is expected. Pending home sales increased by 3.4% in March, but are expected to contract by 0.6% in April.
  • Around 16:05 GMT, Federal Reserve Bank of New York President John Williams delivers keynote remarks at a lunch organized by the Economic Club of New York.
  • Near 18:30 GMT comments are expected from Federal Reserve Bank of Dallas President Lorie Logan, who delivers a speech at an event organized by The Borderplex Alliance.
  • Asian equities are yet again on the back foot, with the Japanese Nikkei and the Chinese Hang Seng Index both down over 1%. European equities are flirting with a turnaround and are flat to mildly in the green. US indices futures are down near 0.50%.
  • According to the CME Fedwatch Tool, Fed Fund futures pricing data suggests a 52.5% chance for keeping rates unchanged in September, against 42.1% chance for a 25 basis points (bps) rate cut and a 4.9% chance for an even 50 bps rate cut. A marginal 0.6% price in an interest rate hike.
  • The benchmark 10-year US Treasury Note trades around 4.59%, the highest level  this week. 

US Dollar Index Technical Analysis: It’s the bond market, stupid!

The US Dollar Index (DXY) has strengthened in the past few hours ever since markets saw yields soaring higher. This, in its turn, asked for a repricing of the Greenback in its stance against other currencies when looking at the rate differential. While US yields were sprinting higher, widening the gap with other countries, the US Dollar outperformed against other currencies. 

On the upside, the DXY index reclaimed the key levels: the 55-day Simple Moving Average (SMA), currently at 104.96, and the 105.00 big round level. It will be important to see if these levels hold support should the US data weaken. Once that is proven, look for 105.52 and 105.88 on the upside. 

On the downside, the 200-day SMA at 104.43 and the 100-day SMA around 104.37 are the last line of defence. Once that level snaps, an air pocket is placed between 104.30 and 103.00. Should the US Dollar decline persist, the low of March at 102.35 and the low from December at 100.62 are levels to consider.  

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.

 

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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