- The US Dollar Index steady in the 103-area though a technical rejection looms.
- The Greenback booked its third consecutive weekly decline on Friday.
- US traders are entering the last two weeks of normal trading before the holidays.
The US Dollar (USD) broadly steadies on the European Monday morning in a risk-averse market mood, driven by increasing tensions in the Middle East after Yemen’s Houthi rebels hit three commercial ships in the Red Sea on Sunday and a US warship responded by shooting down three drones. The Greenbacked posted its three straight weekly decline on Friday, but sentiment could start to shift with only fourteen days left of normal trading before entering the year-end holiday season. All eyes will be on safe-haven flows and the rate spread between the US Dollar and most G20 currencies, as the tightening cycle might be over for many central banks, pushing the US Dollar higher as US rates keep the upper hand.
On the economic front, a very light calendar is due on Monday, but data will pile up throughout the week up to the main event on Friday: the US Jobs Report, or Nonfarm Payrolls. Expect to see mild moves in the crosses against the Greenback with most traders keeping their powder dry for Friday. Other job-related data like the JOLTS and ADP numbers will also be released this week.
Daily digest: Light Monday in employment-packed week
- At 15:00 GMT,US Factory Orders data for October are due to be released. Orders increased 2.8% in September, and markets expect them to decline 2.6% in OCtober.
- The US Treasury can benefit from the recent decline in US rates and will be placing a 3-month and a 6-month bill in the markets.
- Equities continue to slide in Asia. The Hong Kong Hang Seng Index leads the decline, losing more than 1%. European equities are mildly in the red, while US futures are flat ahead of the start of this trading week.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 97.7% chance that the Federal Reserve will keep interest rates unchanged at its meeting next week.
- The benchmark 10-year US Treasury Note trades at 4.24%, and steady off this week’s low.
US Dollar Index technical analysis: Not over yet until the fat lady sings
The US Dollar trades around 103.31 at the time of writing when gauged by the DXY US Dollar Index. From a technical point of view, the US Dollar is trading near crucial levels. Although last week the DXY was unable to break back above important technical levels, it appears that a more substantial catalyst is needed to push the DXY back above that crucial 200-day Simple Moving Average (SMA) near 103.58, visible on a daily chart. With the US Jobs Report on Friday, that might be enough for the Greenback to reestablish its status as King Dollar before closing up shop for the holidays.
The DXY is making its way further up towards the 200-day Simple Moving Average (SMA), which is near 103.58. The DXY could still make it through there should employment data trigger rising US yields again. A two-tiered pattern of a daily close lower followed by an opening higher would quickly see the DXY back above 104.28, with the 200-day and 100-day SMA turned over to support levels.
To the downside, historic levels from August are coming into play, when the Greenback summer rally took place. The lows of June make sense to look for some support, near 101.92, just below 102.00. Should more events take place that initiate further declines in US rates, expect to see a near-full unwind of the 2023 summer rally, heading to 100.82, followed by 100.00 and 99.41.
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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