US Dollar losses mount, almost erasing all 2024 gains in silent siege
- The US Dollar posts a third consecutive day of losses, almost erasing all gains for 2024.
- The Greenback eased on a mixture of elements as markets wait for Jackson Hole at the end of the week.
- The US Dollar index trades near dangerous levels, close to flipping in a negative performance for 2024.
The US Dollar (USD) extends losses on Tuesday after getting sucker-punched on Monday, with all eyes on the US Federal Reserve Jackson Hole Symposium in Wyoming, where Fed Chairman Jerome Powell is set to deliver a pivotal speech. A mixture of risk-on and a very slim data calendar in the runup to Jackson Hole convinced traders that a recession scenario could be avoided and the US economy is on the path to a soft landing. Outside the US, news that Israel could commit to the US ceasefire proposal is also reducing the safe-haven flows toward the Greenback.
On the economic data front, again a very light calendar is ahead on Tuesday, although some sort of cautiousness must be upheld. With all stars aligning for a weaker US Dollar, any comment or data point could see an aggressive reversal of Monday’s moves. With the runup towards the speech from Fed Chairman Powell on Friday, nearly all Fed members will have issued their personal outlook about the interest-rate path, which means still a lot of market-moving comments could be on the way.
Daily digest market movers: Comments underway
- China’s government is weighing whether to let local governments issue bonds to buy homes, according to Bloomberg.
- At 12:55 GMT, the Redbook Index for the week ending August 16 is set to be released. The previous reading showed a 4.7% increase over a one-year period.
- In the runup towards Jackson Hole, nearly all Federal Open Market Committee (FOMC) members will have a window of opportunity to have their say on monetary policy. This Tuesday two members are set to issue comments:
- Federal Reserve Bank of Atlanta President Raphael Bostic gives some remarks at the Atlanta Fed's Payment Inclusion Forum in Atlanta.
- Federal Reserve Vice Chair for Supervision Michael Barr participates in a discussion about cybersecurity at the Joint Financial and Banking Information Infrastructure Committee-Financial Services Sector Coordinating Council Meeting in Washington, D.C.
- Asian equity markets are mixed, with Japanese indices up over 1% while Chinese equities are on the back foot. European and US equities are continuing the positive tone from Monday.
- The CME Fedwatch Tool shows a 77.5% chance of a 25 basis points (bps) interest rate cut by the Fed in September against a 22.5% chance for a 50 bps cut. Another 25 bps cut (if September is a 25 bps cut) is expected in November by 59.3%, while there is a 35.4% chance that rates will be 75 bps below the current levels and a 5.2% probability of rates being 100 basis points lower.
- The US 10-year benchmark rate trades at 3.87% and is looking for direction after last week’s dip.
US Dollar Index Technical Analysis: Back to the drawing board
The US Dollar Index (DXY) is getting very close to erasing its gains for the whole of 2024. That sends Dollar bulls back to the drawing board as the risk of this year's performance flipping into negative is a potential outcome. With this mixture of easing geopolitical tensions and markets embracing again the soft landing pattern ahead of Fed Chairman Jerome Powell’s speech at Jackson Hole, the question is if markets are not running too far ahead of themselves.
Defining pivotal levels becomes very important in order to avoid any dead-cat bounces, in which traders pile in too quickly in a trade and get caught on the wrong side of the fence once the course reverses. First up is 103.18, a level that traders were unable to hold last week. Next up, a heavy resistance level is at 103.99-104.00, and inches above there is the 200-day Simple Moving Average (SMA) at 104.07.
On the downside, the first immediate support comes up at the 101.90 level, which is under pressure at the moment. Levels not seen since early January are popping up, and even a fresh yearly low could come into play once the DXY dips below 101.30 (low from January 2). The low of December 28 at 100.62 will be the ultimate level to look out for.
US Dollar Index: Daily Chart
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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