US Dollar rises on safe-haven flows
- The US Dollar sees some gains, while markets continue looking for clues on the Fed’s next steps.
- Several Federal Reserve members will speak on Monday afternoon.
- Fed’s Beige Book, S&P figures and Initial Jobless Claims will be closely followed this week.
The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, is slightly higher at the start of the week, supported by safe-haven flows amid geopolitical tensions. Some Federal Reserve (Fed) members are scheduled to speak later on Monday, and their comments will be closely watched for any clues on the Fed's monetary policy stance.
Daily digest market movers: US Dollar gains on Middle East tensions and Fed comments
- The US Dollar remains steady, inching up slightly due to escalating geopolitical tensions in the Middle East and supportive comments from Federal Reserve officials.
- However, profit-taking dampens the Greenback's gains as investors react to positive economic data from China and the government's stimulus package.
- Economic activity figures in this week’s S&P data on Thursday might shake the USD, as well as those in the Fed’s Beige Book report on Wednesday.
- Markets continue to bet on higher odds of two cuts in what remains of 2024.
DXY technical outlook: DXY momentum might have hit its ceiling
The DXY index is facing resistance at the 200-day Simple Moving Average (SMA). Despite resuming the gains, the momentum may not be enough to conquer it. Both the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) have flattened in positive territory, indicating a pause in buying momentum with the latter still in overbought territory.
As a result, the index may struggle to regain the 200-day SMA and may instead consolidate sideways in the near term.
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.