US Dollar rises after UoM data
- US Dollar rises after UoM positive data.
- Consumer confidence improves, inflation expectations were mixed.
- FOMC cuts rates by 25 bps, economic growth remains solid.
The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, rose on Friday. This comes after positive University of Michigan data and the announcement that the Federal Open Market Committee (FOMC) lowered interest rates by 25 basis points on Thursday.
The Fed expressed optimism about economic growth but acknowledged easing labor market conditions. Despite the rate reduction, DXY has rebounded and could continue its upward momentum if the data continues coming in strong.
Daily digest market movers: US Dollar rises on Michigan sentiment data, FOMC decision
- The FOMC concluded its two-day meeting with an expected 25 bps rate cut, signaling continued easing amid concerns over global economic growth.
- Despite weak jobs data, other indicators suggest the US economy remains robust, with solid labor market conditions and growth forecasts above trend.
- The Atlanta Fed's GDPNow model estimates Q4 GDP growth at 2.4%, while the New York Fed's Nowcast model tracks it at 2.0%.
- Rising productivity is expected to support low inflationary economic growth, leading to higher real interest rates and currency appreciation in the long term.
- Consumer confidence improved in November with the University of Michigan's Consumer Sentiment Index rising to 73 from 70.5 in October.
- The Current Conditions Index declined slightly to 64.4, while the Consumer Expectations Index climbed to 78.5.
- Inflation expectations remained low, with the one-year outlook edging down to 2.6% and the five-year outlook rising to 3.1%.
DXY technical outlook: DXY maintains bullish momentum, resistance at 105.50
The DXY index's indicators retracted slightly on Thursday but maintained positive momentum by the end of the week. The Relative Strength Index (RSI) stands deep in positive territory, while the Moving Average Convergence Divergence (MACD) prints lower red bars.
The DXY has regained support at its 200-day SMA and completed a bullish crossover between the 200-day and 20-day SMAs. This suggests potential for further upward price action despite a recent pullback this week.
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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