US Dollar strengthens alongside higher US Treasury yields

Source Fxstreet
Jun 20, 2024 16:42
  • US Dollar gets a boost from an increase in US Treasury yields on Thursday.
  • Markets still show signs of caution as Fed officials express a conservative stance on embracing easing cycles.
  • The mixed US economic outlook tempers upside in the Greenback.

On Thursday, the US Dollar, as gauged by the Dollar Index (DXY), saw significant strength on the back of rising US Treasury yields. This follows a dip midweek as market participants analyzed several recently released mid-tier data releases, including soft Retail Sales figures from May. On Thursday, the USD shrugged off weak labor and housing data.

In regard to the US economic outlook, while there are signs of disinflation, Federal Reserve (Fed) officials' measured comments are keeping the market's expectations in check. If the mixed signals from the economy persist, it could potentially hinder further USD strength.

Daily digest market movers: US Dollar gains despite weak data

  • Building Permits declined from 1.44 million to 1.386 million, a dip below predictions.
  • In addition, Housing Starts also decreased, moving from 1.352 million to 1.277 million, missing optimistic estimates.
  • Initial Jobless Claims recorded a slight drop, trending from a revised 243K to 238K. Continuing Jobless Claims saw an increase from 1.813 million to 1.828 million.
  • Philadelphia Fed Manufacturing Survey for June disappointed, posting a 1.3 instead of the projected 5, down from the previous 4.5.
  • Minneapolis Fed President Neel Kashkari noted that returning inflation to the 2% target could take one to two years since current wage growth still outpaces the desired rate.
  • Chances of an interest rate cut remain at about 67% for the upcoming Fed meeting on September 18, according to the CME Group's FedWatch Tool.
  • US Treasury yields saw a considerable rise, with gains exceeding 1%. The 2-year, 5-year and 10-year rates stood at 4.74%, 4.29%, and 4.27%, respectively.

DXY technical analysis: Bullish sentiment gains traction, must recover 105.50

Technical indicators for Thursday's session showed renewed bullish momentum bolstered by increased US Treasury yields. The Relative Strength Index (RSI) held above 50, with a prevailing green histogram in the Moving Average Convergence Divergence (MACD), indicating sustained bullish sentiment.

Additionally, the DXY Index maintains above its 20-day, 100-day and 200-day Simple Moving Averages (SMA). This, combined with the rising indicators, suggests the potential for additional gains in the US Dollar. Yet, given the mixed economic outlook, investors should remain attentive to changes in the market landscape.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

 

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