US Dollar extends recovery as market digests Fed revisions and PPI data
- DXY rallies further following Federal Reserve's decision, trades above 105.00.
- US releases soft PPI figures from May and higher weekly Initial Jobless Claims.
- US Treasury yields continue to move down and may limit the upside.
On Thursday, the US Dollar Index (DXY) continued its positive momentum, extending its recovery into Thursday's session above 105.00. This followed Wednesday's Federal Reserve (Fed) decision and as markets digested fresh Producer Price Index (PPI) figures from May and weekly Initial Jobless Claims, which showcased weaker than anticipated inflation and higher unemployment benefit requests.
The Fed kept its economic activity revisions unchanged while upgrading the Personal Consumption Expenditures (PCE) forecasts. The US economy is currently showcasing mixed signs with preliminary evidence indicating softening inflation but with a resilient labor market, which seems to have made Fed officials project fewer rate cuts in 2024.
Daily digest market movers: DXY reacts to Fed decision, PPI data
- Federal Open Market Committee (FOMC) dot plot update on Wednesday shows just one rate cut for 2024 as the median outcome, down from the three rate cut expectation last March by Fed Officials.
- This adjusted the market's expectations, which priced in between one or two cuts this year, indicating a longer timeline for potential rate cuts.
- Producer Price Index (PPI) for final demand rose 2.2% on a yearly basis in May, below the market expectation of 2.5%.
- Annual core PPI rose by 2.3%, also below market expectations.
- Weekly Jobless Claims showed 242K in the week ending June 8, higher than initial estimates of 225K and last week's print of 229K.
DXY technical analysis: Bulls maintain control and recover SMAs
Following Wednesday’s session, indicators recovered to stand in positive terrain. The Relative Strength Index (RSI) is now above 50 midline, and the Moving Average Convergence Divergence (MACD) is printing green bars. In addition, the Index is now trending above its 20, 100, and 200-day Simple Moving Averages (SMA). This extends the bullish outlook for the US Dollar, following Wednesday’s sharp decline.
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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