US Dollar declines as Fed easing expectations intensify
- US Dollar dealt bad hand as market considers higher initial Fed rate cut.
- Market prices in high odds of a 50 bps cut at Wednesday's FOMC meeting.
- Fed Dot Plot unlikely to validate an aggressive rate cut path.
The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, is extending a corrective decline amid rising dovish expectations for the Federal Reserve's (Fed) meeting on Wednesday. The DXY is trading lower for the third consecutive day, near 100.70, as the market prices in a decently high probability of a 50-basis-point cut.
With signs of a slowdown in inflation and cooling in the labor market, investors have grown confident in a 50 bps cut and over 100 bps of easing by year-end.
Daily digest market movers: US Dollar declines ahead of FOMC meeting
- Fed easing expectations surge ahead of Wednesday's FOMC decision, buoyed by lukewarm inflation data.
- Analysts widely anticipate a 25 bps rate cut, but some project a bolder 50 bps move, while markets price in a 65% chance of the latter.
- Market expectations of 250 bps of easing over the next year are deemed excessive, with the Fed's Dot Plot unlikely to support such an aggressive path.
- FOMC vote will be closely scrutinized for signs of internal divisions.
Daily digest market movers: DXY shrugs off weak sentiment data on the back of hawkish bets
Technical indicators for the DXY index have resumed their downward trend in negative territory. The index has broken below its 20-day Simple Moving Average (SMA), indicating a loss of buying momentum. The Relative Strength Index (RSI) is below 50, suggesting further declines. The Moving Average Convergence Divergence (MACD) is also trending lower, confirming the bearish outlook.
Support levels to watch are 100.50, 100.30 and 100.00, while resistance levels to consider are 101.00, 101.30 and 101.60.
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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