US Dollar extends losses as weak Retail Sales weigh on sentiment
- The US Dollar Index fell close to 107.00 after Thursday’s sharp decline.
- US Retail Sales fell 0.9% in January, missing expectations and fueling rate cut speculation.
- US Treasury yields continue to decline with the 10-year yield below 4.50%.
The US Dollar Index (DXY), which tracks the US Dollar's performance against six major currencies, remains stable after posting losses in the previous session. At the time of writing, the DXY hovers around 107.00, as economic data continues to paint a mixed picture. Weak Retail Sales weigh on sentiment, but Industrial Production provides some support.
Daily digest market movers: US Dollar weakens as traders reassess Fed outlook
- US Retail Sales dropped 0.9% in January, far worse than the -0.1% forecast, raising concerns about consumer spending.
- December Retail Sales were revised higher to 0.7%, slightly offsetting the latest disappointing data.
- Industrial Production rose 0.5% in January, beating expectations of 0.3% but slowing from December’s 1.0% growth.
- Weak Retail Sales may lead traders to reassess expectations for the Federal Reserve’s rate path.
- Fed Chair Jerome Powell reiterated that monetary policy adjustments require tangible inflation progress or labor market weakness.
- As for now, the CME FedWatch Tool now shows a 55% probability of unchanged rates in June, reflecting market uncertainty.
- US Treasury yields continue to decline sharply with the 10-year yield falling to 4.47% and making investors lose interest in the US Dollar.
DXY technical outlook: Further downside risk as bearish momentum builds
The US Dollar Index remains under pressure after losing the 20-day Simple Moving Average (SMA), signaling a bearish shift. The Relative Strength Index (RSI) continues to weaken, confirming negative momentum, while the Moving Average Convergence Divergence (MACD) remains entrenched in bearish territory.
Immediate support is seen at the 100-day SMA near 106.30 with a break below this level likely to confirm a short-term negative outlook. On the upside, resistance is now seen at 107.50, followed by the 20-day SMA at 108.00.
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.