The US Dollar (USD) falls and in the process is erasing all gains from past Wednesday. The big batch of data points that came out made traders cherry pick which elements they would take for their assessment on where to position the US Dollar. Elements such as the uptick in Continuing Claims, the soaring Wholesales Inventory number and the flat fall of Durable Goods was enough to send the US Dollar lower.Â
On the US economic calendar front, all data is out of the way and markets will now be on the lookout for the Federal Reserve’s preferred inflation Gauge: the Personal Consumption Expenditures on Friday. Should those fade as well, as a sign of further disinflation, markets might challenge the current hawkish stance of the Fed with a weaker US Dollar at hand. That would mean in the US Dollar Index, that a fall back to 105.00 or lower could be in the cards.Â
The US Dollar Index (DXY) has been strolling through markets with a big thanks to some outside effects. Although for now the near support level at 105.89 looks to be holding, expect with the mixture of data this Thursday and Friday to cause some whipsaw moves. Rather look for the dust to settle late Friday to see where the US Dollar will be heading once a clear picture has been revealed.Â
On the upside, the biggest challenge remains 106.52, the year-to-date high from April 16. A rally to 107.35, a level not seen since October 2023, would need to be driven by a surprise uptick in US inflation or a further hawkish shift from the Fed.Â
On the downside, 105.53 is the first support ahead of a trifecta of Simple Moving Averages (SMA). First is the 55-day SMA at 105.27, safeguarding the 105.00 round figure. A touch lower, near 104.70 and 104.46, both the 100-day and the 200-day SMA form a double layer of protection to support any declines. Should this area be broken, look for 104.00 to salvage the situation.Â
US Dollar Index: Daily Chart
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 FedÂ’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 FedÂ’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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