US Dollar slides amid mixed PMI data and softer tariff comments

Source Fxstreet
  • The US Dollar Index remains under pressure, testing the 107.50 level after a steep weekly decline of over 2%.
  • S&P Global Composite PMI signals slower growth at 52.4 in January, compared to 55.4 in December.
  • Markets now turn their attention to the next week’s Fed decision.

The US Dollar Index (DXY), which measures the value of the US Dollar against a basket of currencies, is experiencing sustained losses as it sinks below 107.50, its lowest level this week. US President Trump’s softer tone on proposed tariffs on China added to the currency’s bearish sentiment. Meanwhile, economic data continued to show mixed signals, leaving traders cautious.

Daily digest market movers: US Dollar slips after economic data and Trump remarks

  • The S&P Global Composite PMI dropped significantly to 52.4 in January from 55.4 in December, showing a slower pace of expansion.
  • Manufacturing PMI climbed to 50.1, exceeding forecasts of 49.6, reflecting a slight recovery in factory production activity.
  • Services PMI decreased to 52.8 from 56.8, signaling weaker momentum in service sector growth.
  • On Thursday, US Initial Jobless Claims rose to 223,000 for the week ending January 18, higher than the prior week’s revised 217,000 figure.
  • Continuing Jobless Claims jumped by 46,000 to 1.899 million, highlighting increasing challenges in the labor market.
  • Regarding the new administration’s plans, President Trump softens rhetoric on Chinese tariffs at Davos, suggesting some potential easing of trade tensions.

DXY technical outlook: Signs of deeper bearish momentum

The US Dollar Index (DXY) has dropped below the key 108.00 level, showing continued vulnerability to bearish momentum. The RSI remains under 50, signaling weaker relative strength, while MACD histogram bars deepen in negative territory, suggesting further downside.

The 20-day Simple Moving Average (SMA) around 108.00 now acts as a critical resistance level. A failure to reclaim this threshold could lead to additional losses with the next support zone seen near 107.00. Conversely, a recovery above 108.00 could stabilize the Greenback’s outlook and limit further declines.

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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