US Dollar softens after reaching yearly high on Dollar Index
- US Dollar retreats after reaching its highest level after labor and inflation data.
- US citizens filing new applications for unemployment insurance last week arrived below expectations.
- The headline PPI for October came in at 2.4%, higher than expected.
The US Dollar Index (DXY), a measure of the value of the USD against a basket of six currencies, softened after hitting a fresh year-to-date high near 107.00. The Greenback has been on a rise in recent days, but profit-taking and disappointing US economic data have led to a slight retracement. The headline Producer Price Index (PPI) for October came in at 2.4% YoY, above expectations of 2.3%, and the PPI excluding Food and Energy rose to 3.1% YoY, also arriving above forecasts.
Additionally, US citizens filing new applications for unemployment insurance was reported at 217K for the week ending November 9, which came in below expectations of 223K. .
Daily digest market movers: US Dollar eases after hitting new annual high due to profit-taking and economic data
- Initial Jobless Claims in the US increased to 217K in the week ending November 9, below estimates of 223K and the prior week’s 221K.
- The seasonally-adjusted insured unemployment rate remained at 1.2%, while the four-week moving average decreased to 221K.
- Headline PPI in the US rose 2.4% YoY in October, exceeding estimates and marking a significant increase from September's 1.9% revised gain.
- Excluding Food and Energy, PPI increased by 3.1% YoY, higher than expectations and the previous reading of 2.9%.
- On a monthly basis, headline PPI and core PPI both rose by 0.2% and 0.3%, respectively, meeting expectations but higher than the previous rate.
DXY technical outlook: Index shows bullish momentum, but overbought indicators warrant caution
The technical analysis of the DXY Index indicates a surge in momentum, driven by strong gains in the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD). However, as these indicators approach overbought territory, the DXY may enter a period of consolidation.
The recent surge and subsequent retreat in the DXY suggests that buyers may be taking profits after a strong rally. This could indicate a potential reversal or consolidation in the short term. The 107.00 level has acted as a strong resistance, and its failure to break through on a sustained basis could add weight to the notion of a pullback.
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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