US Dollar declines further after Retail Sales, labor market data
- The DXY Index recorded losses in Thursday’s session, falling toward 104.40.
- Retail Sales from January declined higher than expected.
- Weekly Initial Jobless Claims came in strong.
The US Dollar (USD) measured by the Dollar Index (DXY) declined further on Thursday, this time fueled by weak Retail Sales figures from January.
Despite the weak Retail Sales figure, the US economy continues to show signs of being overheated, as seen in the higher-than-expected inflation figures from January that reinforce the case for the Fed delaying rate cuts. On Friday, Producer Price Index (PPI) figures will be closely watched as they may provide additional traction to the USD in case they come in higher than expected.
Daily digest market movers: US Dollar loses ground on weak economic data
- Retail Sales declined -0.8% MoM in January, beating the 0.1% decline expected.
- Industrial Production from the first month of 2024 declined by -0.1% MoM, while markets expected a 0.3% expansion.
- On the bright side, Initial Jobless Claims from the week ending February 9, came in lower than expected at 212K.
- Despite the weak data, markets are still confident about delaying rate cuts by the Federal Reserve (Fed), and as long as investors push the start of easing to June, the USD’s losses are limited.
Technical analysis: DXY will be good as long as buyers hold the 100-day SMA
The technical analysis on the daily chart reflects a negative slope in the Relative Strength Index (RSI), indicating selling momentum in the short term. The Moving Average Convergence Divergence (MACD) shows decreasing green bars, further supporting the concept of selling pressure.
However, despite these short-term negative indicators, the Dollar Index remains above the 20, 100, and 200-day Simple Moving Averages (SMAs), suggesting that the overall trend is still controlled by bulls.
US Dollar FAQs
What is the US Dollar?
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.
How do the decisions of the Federal Reserve impact the US Dollar?
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.
What is Quantitative Easing and how does it influence the US Dollar?
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.
What is Quantitative Tightening and how does it influence the 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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