US Dollar gains as markets turn risk-averse

Source Fxstreet
  • US Dollar DXY experiences extended gains, approaching 104.30 as sellers step back.
  • Concerns over the US labor market might burden the USD.
  • Risk aversion benefited the US at the end of the week.

On Friday, the US Dollar measured by the DXY index continued its rebound beyond the 104.00 mark, reaching 104.30, despite persistent worries about the labor market. This rise can be attributed to the sellers easing off and markets refuging itself in safe havens. Market anticipations of a rate cut in September by the Federal Reserve and the fragility of the US labor market are primary factors investors are focused on as their impact could put additional pressure on the currency.

The US economic outlook shows signs of disinflation, with financial markets remaining confident in a September rate cut. Despite this, Federal Reserve officials continue to exhibit hesitancy to hastily make interest rate cuts, sticking to a data-dependent approach.

Daily digest market movers: DXY recovers, Federal Reserve policy outlook and upcoming US elections the movers

  • The two key catalysts currently contributing to USD movements are the outlook for Fed policy and the US elections, each having different implications for the USD.
  • This month, the USD has attached more attention to Fed policy predictions. This is anticipated as the Fed is likely to cut rates prior to the US elections.
  • In recent weeks, anticipations of a September Fed rate cut have made the USD relinquish its position as the top-performing G10 currency this year, mainly due to the report of weak inflation and labor market data.
  • The CME FedWatch Tool seems to strongly support a rate cut in September, suggesting that a nearly full rate cut is firmly expected.

DXY Technical outlook: Bearish outlook persists despite gains, must regain the 200-day SMA

The DXY successfully continued its rebound to around 104.30, but the outlook is still bearish with the index continuing to stand below its 200-day Simple Moving Average (SMA). However, daily technical indicators, like the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), have gained some steam despite still being in negative terrain, signifying that bearish pressures are yet to disperse.

The solid support levels continue to lie at 103.50 and 103.00, however, the general technical outlook still favors the bears. Buyers on the other hand should focus on regaining the 200-day SMA at 104.30.

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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