US Dollar Index (DXY) reaches resistance near 100.50 ahead of the NFP release
- The US Dollar Index reaches an important resistance area ahead of 100.50 following a five-day rally.
- The hawkish minutes of the last Fed meeting have given a fresh boost to the US Dollar.
- Later today, the US NFP might determine the Greenback's near-term direction.
The US Dollar is trading higher across the board on Thursday as investors pare back bets of a Fed interest rate cut in December. The USD Index, which measures the value of the Dollar against a basket of peers, has reached the area between 100.35 and 100.50, which capped bulls in May, August, and early November.
The release of hawkish minutes of the latest Federal Reserve meeting provided a fresh impulse to an already firm US Dollar, which had drawn support from the risk-averse market sentiment in previous days.
Markets pare back hopes of a December rate cut
The Fed cut interest rates by a quarter-point on October 29. Still, the minutes of the meeting have revealed a wider-than-expected divergence within the committee, with “many” policymakers opposing the decision. This has raised doubts about the possibility of further monetary easing in December.
Furthermore, the Dollar rallied to fresh 10-month highs against the Japanese Yen, as news that Prime Minister Takaichi’s cabinet is preparing a stimulus package that might exceed the 20 trillion Yen (USD 129 billion) has boosted concerns about Japan’s public finances.
In the US, the focus on Friday is on September’s delayed US Nonfarm Payrolls report, which is expected to show that the US economy created 55,000 new jobs on the month. These figures improve the 22,000 increase seen in August, but they are still well below the average of 2024.
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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