US Dollar ekes out mild gains as market mood sours
- The US Dollar trades mildly in the green after China fixes its Yuan at the lowest level since November.
- Markets gear up for two data-packed days in the US.
- The US Dollar index trades broadly sideways, keeping its head above 105.00.
The US Dollar (USD) trades mildly in the green on Thursday, advancing against most major peers with exceptions such as the Japanese Yen (JPY) and the Swiss Franc (CHF) when it was trading ahead of its Swiss National Bank (SNB) rate decision which triggered a reversal now . The Greenback appears to be supported by the broad risk-off market mood, with traders concerned as the People’s Bank of China (PBoC) has set the Yuan’s reference rate at 7.1192 against the US Dollar, its weakest level since November.
On the US economic data front, the schedule resumes after the brief hiatus due to the Juneteenth public holiday. Per usual on Thursday, the weekly Jobless Claims will be on the forefront after numbers started to tick up last week. The Philadelphia Fed Manufacturing Survey will be the second focal point.
Daily digest market movers: Asia moving markets
- An eventful Asia-Pacific session triggered substantial moves in the Forex space:
- The People’s Bank of China (PBoC) has let loose its daily fixing, weakening to a fresh low for 2024 against the US Dollar.
- The New Zealand Dollar (NZD/USD) advanced substantially against the Greenback after the country’s economy expanded by 0.2% in the first quarter, which means the country is out of its brief technical recession.
- Asian equities rolled over with concerns that the Chinese economy might be doing worse than markets anticipated, seeing the actions from the PBoC to devalue its currency.
- A big batch of data will be released at 12:30 GMT:
- May’s Building Permits and Housing Starts:
- Building Permits are expected to tick up to 1.45 million from 1.44 million.
- Housing Starts should paint a similar picture as the permits, with an uptick from 1.37 million units to 1.36 million.
- Weekly Jobless Claims:
- Initial Claims are expected to ease to 235,000 from 242,000.
- Continuing Claims should abate as well, to 1.81 million from 1.82 million.
- An uptick in Jobless Claims would mean a second consecutive week of increases, possibly triggering some US Dollar weakness.
- The Philadelphia Fed Manufacturing Survey for June should tick up from 4.5 to 5.
- May’s Building Permits and Housing Starts:
- Two US Federal Reserve Speakers to look out for was well this Thursday:
- At 12:45 GMT, Federal Reserve Bank of Minneapolis President Neel Kashkari participates in a fireside chat as part of the Michigan Bankers Association Annual Conference.
- Near 20:00 GMT, Federal Reserve Bank of Richmond President Thomas Barkin participates in a conversation and Q&A session about the economic outlook at the Richmond Risk Management Association.
- Equities are rolling over with red numbers across Asia. European and US futures are snapping that negativeness and are in the green after the European opening bell.
- The CME Fedwatch futures for September are further backing in a rate cut, with odds now standing at 59.5% for a 25 basis point cut. A rate pause stands at a 34.1% chance, while a 50-basis-point rate cut has a slim 6.4% possibility.
- The US 10-year benchmark rate is trading at 4.24%, right in the middle of this week’s range.
US Dollar Index Technical Analysis: It never was going to be easy
The US Dollar Index (DXY) is putting up a heavy fight, with a bit of a thank you to the Asian uncertainty after the PBoC let loose its stronger Yuan fixing. With concerns growing that there might be something brewing in China with more monetary policy coming in, some slumbering support for the DXY could linger on and limit any substantial downturns.
On the upside, there are no big changes to the levels traders need to watch out for. The first is 105.52, a barrier that held during most of April. The next level to watch is 105.88, which triggered a rejection at the start of May and will likely play its role as resistance again. Further up, the biggest challenge remains at 106.51, the year-to-date high from April 16.
On the downside, the trifecta of Simple Moving Averages (SMA) is still playing as support. First is the 55-day SMA at 105.14, safeguarding the 105.00 figure. A touch lower, near 104.61 and 104.48, both the 100-day and the 200-day SMA are forming a double layer of protection to support any declines. Should this area be broken, look for 104.00 to salvage the situation.
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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