US Dollar gains restricted by falling Treasury yields
- US Dollar DXY experiences a restricted gain as falling US Treasury yields may pose challenges during the session.
- US political changes continue to influence, and core PCE to be on focus next week.
- Fed officials maintain their data-dependent stance, keeping markets on their toes.
On Tuesday, the US Dollar measured by the DXY, witnessed a slight rise, albeit falling US Treasury yields are expected to pose a significant challenge for the rest of the session. This comes amidst expected shifts in financial markets due to new hints about economic plans from former President Donald Trump after Joe Biden's exit. The focus is still on high-tier data due this week.
Given signs of disinflation in the US, markets express optimism over potential rate adjustments in September. Even with these shifts on the horizon, Federal Reserve officials have reiterated their cautious approach toward deciding on rate changes, hence keeping the markets on their toes. Major indicators to watch out for over the week include Personal Consumption Expenditures (PCE) and Gross Domestic Product (GDP) Q2 revisions.
Daily digest market movers: US Dollar mildly up as focus shifts to PCE
- Mid-tier housing data came in lower than expected with Existing Home Sales posting a higher-than-expected monthly drop in June but didn’t trigger major movements on the USD.
- Weak Richmond Fed manufacturing index didn’t stop the USD bulls from advancing.
- On Friday, forecasts placed the core PCE at a 0.16% MoM increase and the spending is projected at a 0.3% MoM increase.
- The CME FedWatch Tool indicates a highly probable rate cut in September, although GDP and PCE data are set to determine the week's dynamics for the USD.
- US Treasury yields are down with the 2,5 and 10-year rates at 4.51%, 4.16% and 4.23%.
DXY Technical outlook: A slight bullish spree, yet bearish signs linger
Despite the current uplift above the 200-day Simple Moving Average (SMA), the DXY index still carries a neutral to bearish outlook. Bearish signals resurface as the DXY index's indicators are still largely in the negative zone, while a looming bearish crossover between the 20 and 100-day SMAs is evident around the 104.80 area. This, if completed, could give substantial momentum to the sellers.
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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