US Dollar witnesses further drop amid weak labor market figures
- US Dollar extends its downward trend after ending last week with 0.85% loss.
- NFPs highlight was an unexpected rise in Unemployment.
- Markets are now seeing two cuts in 2024.
The US Dollar, represented by the DXY Index, has extended its decline, weighed down by soft labor market figures falling below 105.00 on Friday.
Amid growing signals of disinflation in the US economy, there is growing confidence in a September rate cut. However, Federal Reserve (Fed) officials continue to refrain from immediate rate cuts, maintaining a data-dependent approach, but have started to acknowledge labor market struggles.
Daily digest market movers: US Dollar sags further after lackluster labor market data
- Nonfarm Payrolls (NFP) in the US increased by 206K in June as reported by the US Bureau of Labor Statistics (BLS) on Friday.
- NFP figure exceeds the market expectation of 190K yet falls short compared to May's revised increase of 218K (adjusted from 272K).
- Unemployment Rate inched higher to 4.1% from 4%, and the Labor Force Participation Rate edged up slightly to 62.6% from 62.5%.
- Average Hourly Earnings, the key metric for wage inflation, dipped to a YoY rise of 3.9% from 4.1%, aligning with market expectations.
- Fed swaps market has resumed full pricing in two rate cuts for year-end.
- Nonetheless, those figures will depend on how Fed officials interpret ongoing labor market data and inflation figures.
DXY technical outlook: DXY continues to be plagued by challenges, now approaching 200-day SMA
After losing its hold over the 20-day Simple Moving Average (SMA), the technical outlook for the DXY Index has turned negative. Both the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) indicator have dipped into the negative zone with the latter at its lowest since mid-June.
If the selling pressure persists, the 104.70 level (200-day SMA) will offer strong support.
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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