US Dollar battles losses following disappointing ISM Services data
- The DXY Index is significantly lower, near 103.65, on Tuesday.
- The ISM Services PMI from February reflected lower-than-expected figures.
- The focus now turns to labor market data.
The US Dollar Index (DXY) is trading around 103.65, losing some ground. The causes for these latest movements are primarily focused on February's Purchasing Managers Index (PMI) report on the Services sector from the Institute for Supply Management (ISM), which came in lower than expected. If markets start to fear an economic slowdown, they may start to bet on a less aggressive Federal Reserve (Fed).
Despite some evidence of softness in the US economy, it is showing resilience overall. This is making investors confident that the Fed will start easing in June, which may provide a cushion to the US Dollar’s losses. The labor market data set to be released this week will be key to shaping those expectations.
Daily digest market movers: DXY loses some ground on weak data, hawkish bets on the Fed cooldown
- The ISM Services PMI for February, reported by the Institute for Supply Management, is 52.6, which fell short of the expected 53 but is fairly steady compared to January's 53.4
- An 80% probability of an interest rate reduction in June is being anticipated by the markets, which means a decrease from 100% at the end of the previous week.
- US Treasury bond yields are on the decline with 2-year yields trading at 4.56%, while the 5-year yields, and 10-year yields at 4.15%.
- Labor data reports to be released this week include February’s Nonfarm Payrolls, Average Hourly Earnings and the Unemployment Rate, all of which are closely followed by the Fed.
- The outcome of labor market metrics will shape the dynamics of the Greenback for the near term.
DXY technical analysis: DXY bears gain ground, conquer 200-day SMA
The Relative Strength Index (RSI) presently occupying negative territory with a negative slope supports the idea of bears’ wielding strength. This suggests that bears maintain a strong hand at this juncture. Likewise, the Moving Average Convergence Divergence (MACD) registers rising red bars, bolstering the narrative that selling momentum currently prevails.
Assessing the position of the index concerning its Simple Moving Averages (SMAs), it is now trading below the 20, 100 and 200-day SMAs, which suggests that unless the buyers make a move, the outlook has turned negative.
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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