US Dollar declines as market digests FOMC decision
- FOMC meeting ended with 50 bps interest rate cut to the 4.75%-5.00% range.
- The Dot Plot suggests a gradual easing cycle that hints at three cuts in 2024.
- Chair Powell stressed during his presser that the Fed is not in a rush.
The US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, is trading flat near 100.70 on Thursday as the market digests the Federal Reserve's (Fed) 50-basis-point (bps) cut. The market overreacted to the news, intensifying expectations of further easing despite the Fed's efforts to indicate a gradual easing cycle. On Thursday, the US released strong Initial Jobless Claims figures, which stopped the USD’s bleeding.
The United States economy is experiencing mixed signals with signs of both deceleration and resilience. While some economic indicators suggest a slowdown, others indicate that activity remains robust. The Fed has indicated that the pace of future interest rate adjustments will be guided by incoming economic data, so the DXY index will be sensitive to incoming reports.
Daily digest market movers: US Dollar declining, market pricing in more easing
- FOMC cut rates by 50 bps on Wednesday, although the Dot Plot suggests a more gradual easing cycle going forward.
- Despite the Fed's efforts to push back against market easing expectations, they have intensified.
- After initially lowering its expectations following the decision, the market is now factoring in an additional 75 basis points of rate cuts by the end of the year.
- The market anticipates close to 250 basis points of further cuts over the next year, which would bring the fed funds rate significantly below the neutral level.
- Fed released updated macro forecasts, which show that growth remains robust in Q3.
- On the data front, US citizens who newly applied for unemployment insurance benefits reached 219K in the week ending September 14, below expectations and the previous weekly figure.
- Advance seasonally-adjusted insured unemployment rate was 1.2%, and the 4-week moving average was 227.
DXY technical outlook: DXY under bearish momentum, must recover 101.00
The DXY index indicators remain bearish, having lost the 20-day Simple Moving Average (SMA). Selling traction is mounting with the Relative Strength Index (RSI) trending downward below 50. The Moving Average Convergence Divergence (MACD) is printing lower green bars, indicating a shift to bearishness.
Supports are located at 100.50, 100.30 and 100.00, while resistance levels are at 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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