US Dollar declines ahead of US election
- US Dollar declines after increased probability of VP Kamala Harris winning the Pennsylvania vote.
- NFP in the US rose by 12,000 in October on Friday, starkly missing expectations.
- Markets fully price in a 25 bps cut at Friday’s FOMC decision and 85% chance of another cut in December.
The US Dollar (DXY), which measures the value of the USD against a basket of six currencies, fell to a fresh nine-day low on Monday after polls showed Vice President Kamala Harris taking the lead in the US presidential election. The drop marks a reversal of the USD's recent strength, which had been driven by expectations of a Donald Trump victory and strong economic data.
The US Dollar has faced temporary setbacks due to profit-taking but has rebounded, consolidating near 104.00. The upcoming Federal Reserve (Fed) decision on Friday, as well as the outcome of the US election, is expected to influence the DXY's direction, with markets pricing in a 25-basis-point rate cut.
Daily digest market movers: US Dollar declines amidst presidential election volatility, markets digest NFP
- The disappointing Nonfarm Payrolls report of 12,000 net new jobs in October despite a consensus estimate of 113,000 triggered a decline in the US Dollar.
- The Unemployment Rate remained unchanged at 4.1%, while the Labor Force Participation Rate inched down to 62.6%.
- The Average Hourly Earnings increased to 4% YoY from 3.9%, suggesting continued wage inflation.
- The robust Services PMI, which rose to 54.9 from 51.5, contradicted the weak NFP data.
- Markets expect a 25 bps cut from the Fed next week and another 25 bps cut in December.
- No Fed speakers are scheduled this week due to the media blackout before the FOMC meeting.
- Bets on a Donald Trump victory in the presidential election, expected to lead to inflationary policies, also supported the US Dollar in the last several sessions, but weekend polls showing rising odds in favor of Kamala Harris have triggered a decline.
DXY technical outlook: DXY consolidates under 104.00 bearish momentum seen
The DXY index continues consolidating around the 103.70 level. The Relative Strength Index (RSI) points downward, escaping overbought territory, while the Moving Average Convergence Divergence (MACD) prints lower green bars.
Key support levels to watch are 103.50, 103.30 and 103.00, while resistance levels are 104.00, 104.50, and 105.00.
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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