US Dollar Index slides to two-day lows on gloomy NFP
- The Greenback reverses part of its recent pullback on Friday.
- US Nonfarm Payrolls disappointed estimates at 73K in July.
- Next on tap on the US docket will be the ISM Manufacturing PMI.
The Greenback, when tracked by the US Dollar Index (DXY), rapidly left behind the area of recent lows and slipped back to the vicinity of the 99.00 neighbourhood at the end of the week.
Door open to a rate cut in September?
Indeed, the index lost momentum after the US economy created 73K jobs iJuly, and the unemployment rate ticked a tad higher to 4.2%, while average hourly earnings—a proxy for inflation—rose to an annualiseded 3.9%.
The move lower in the buck comes amid an equally pronounced correction in US yields, which are retesting the area of multi-week lows across different maturities.
In the meantime, the recent readings from the US jobs report could reignite speculation that a rate cut by the Fed still has a chance to materialise in September.
Moving forward, investors are also expected to closely follow the release of the always-relevant ISM Manufacturing PMI, followed by the final prints of the U-Mich Consumer Sentiment gauge.
Technical space
The multi-year low of 96.37 (July 1) emerges as the next contention one for DXY in case bears regain the upper hand. Once cleared, the index might attempt a move to the February 2022 floor of 95.13 (February 4), prior to the 2022 base of 94.62 (January 14).
On the upside, the weekly ceiling of 100.25 (August 1) emerges as the immediate barrier. Further north comes the weekly peak at 100.54 (May 29), ahead of the May top at 101.97 (May 12).
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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