US Dollar consolidates weekly loss with equities as biggest winners
- The US Dollar trades in the red on Friday, and for the week.
- Market sentiment was very positive for equities, bearish for the US Dollar this week.
- The US Dollar Index falls below 104 again and selling pressure is visible on the charts.
The US Dollar (USD) is closing this week’s performance at a loss. A correlation with the risk sentiment and the fact that equities had a very upbeat week makes it clear that the US Dollar does not thrive when there is a risk on tone present in markets. With all three major US equity indices firmly higher for this week, the US Dollar Index is taking a step back and is set to close out the week lower.
On the economic data front, there is nearly nothing to report. Besides possibly a few surprise unscheduled comments from an US Federal Reserve member, it looks like markets will slowly head out into the weekend. Next week, nearly every day sees a pivotal number due to be released, with Durable Goods, US Gross Domestic Product, Personal Consumption Expenditures and Manufacturing data from the Institute of Supply Management all on the docket.
Daily digest market movers: TGIF
- Nikkey Haley and former US President Donald Trump are facing their next vote in the presidential race this Saturday. This time the stage is in South Carolina with primaries on the docket.
- ECB governor Robert Holzmann made comments on Bloomberg television, saying that the European Central Bank (ECB) will not cut this year and will only consider cutting later and bigger rather than cutting too early.
- The EU is set to release its list of sanctioned companies in Russia, China, India and several other countries that are seen by the EU as aiding Russia in its war.
- The US from their side are still working on another sanction package this Friday. The packages come after opposition leader Alexei Navalny died in detention a few days ago.
- Equities are flat ahead of the US opening bell this Friday. That this rally is not done yet, was noticeable in Japan where the Nikkei rallied again over 2%. Europe and the US are rather reluctant to follow suit and are flat for now.
- The CME Group’s FedWatch Tool is now looking at the March 20 meeting. Expectations for a pause are at 97.5%, while chances of a rate cut stand at 2.5%.
- The benchmark 10-year US Treasury Note trades around 4.34%, which is near the highest level for this week.
US Dollar Index Technical Analysis: Keep powder dry for next week
The US Dollar Index (DXY) is set to close this week in the red after a lacklustre performance. The Greenback was outmatched by the risk on sentiment that swept equity markets higher. Seeing the light calendar, it looks like not much movement will be taking place ahead of the weekend. Expect to see traders keep their powder dry for next week where almost every day a pivotal economic data number is set to move the needle.
To the upside, the 100-day Simple Moving Average (SMA) near 104.07 is the first level to watch as a support that has been turned into a resistance. Should the US Dollar jump to 105.00, 105.12 is a key level to keep an eye on. One step beyond there comes 105.88, the high of November 2023. Ultimately, 107.20 – the high of 2023 – could even come back into scope, but that would be when markets reprice the timing of a Fed rate cut again, delaying it to the last quarter of 2024.
The 200-day Simple Moving Average at 103.73 was broken on Thursday and should see more US Dollar bears flock in to trade the break for a weaker US Dollar. The 200-day SMA should not let go that easily, so a small retreat back to that level could be more than granted. Ultimately, it will lose its force with the ongoing selling pressure and could fall to 103.16 at the 55-day SMA.
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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