US Dollar weakened on Monday as markets awaits for Fed's policy updates
- USD is pressured by a pullback in US Treasury yields due to anticipated clarity on the Fed's policy.
- Fed officials express concern over potential easing with the US economy growing above trend.
- Investors await Powell’s remarks at the Jackson Hole Symposium on Thursday.
On Monday, the US Dollar (USD), measured by the US Dollar Index (DXY), declined to its lowest level since January around 102.20 following a pullback in US Treasury yields. Market participants are awaiting clarity on the Federal Reserve's (Fed) policy outlook.
Despite the modest setback, the US economy indicates sustained progress above trend, which suggests the market may be overestimating aggressive future easing.
Daily digest market movers: US Dollar weakens as market anticipates strong Fed easing
- DXY Index is expected to weaken in the short term due to the market's perception that the Fed is set to relax monetary policy in light of recent data indicating an economic slowdown.
- July Retail Sales report showed a stronger-than-expected rise, signaling resilient consumer spending and suggesting the US economy may not be as weak as feared.
- The robust labor market continues to drive wage increases, supporting consumer spending and suggesting no immediate recession threat.
- This suggests that the market seems to be overestimating the Fed, and that might get a surprise if the bank delays the cutting cycle.
- On Thursday and Friday, Fed Chair Jerome Powell will be on the wires at the Jackson Hole Symposium, where markets will look for clues regarding the next steps.
DXY technical outlook: A weakening bias persists and DXY loses key support
The technical indicators for the DXY Index are consolidating, albeit in negative territory, reflecting subdued price action with the Relative Strength Index (RSI) down deeply near 30. The Moving Average Convergence Divergence (MACD) bars appear to be growing red, suggesting consistent selling pressure. The index break signals the end of sideways trading in the 102.50-103.30 channel, which strengthens selling arguments.
Support Levels: 102.20, 102.00, 101.80.
Resistance Levels: 103.00, 103.50, 104.00.
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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