US Dollar dips to multi-month lows on dovish Fed bets
- The US Dollar measured by the DXY Index plunges to a seven-month low amidst declining Treasury yields.
- Investors turn their gaze toward Powell's forthcoming address at Jackson Hole for further cues on subsequent Fed rate cuts.
- A September cut is almost a done deal, based on interest rate bets.
The US Dollar, benchmarked by the US Dollar Index (DXY), recorded a seven-month low, in correspondence with a falling trend in Treasury yields and intense dovish bets on the Federal Reserve (Fed). In response to the circulating sentiment built around Chair Jerome Powell's forthcoming statements at the Jackson Hole assembly that begins on Thursday, market investors are focusing on potential disclosures regarding future Fed rate cuts.
Despite this evolution, the US economic outlook remains resilient. Comprehensive scrutiny of recent data consolidates the fact that the US economy still persists in growing above its trend. This indicates a recurrent market narrative inclined toward the anticipation of aggressive loosening in monetary policy.
Daily digest of market movers: DXY Index reaches seven-month low ahead of Jackson Hole Symposium
- At the start of the week, the DXY Index has been recording a consistent fall, now at its lowest mark in seven months against all major global currencies.
- The US economy, in contrast, showcases stability with a benign rate of inflation and solid domestic demand.
- The marketplace, notwithstanding, speculates an imminent dovish spree by the Fed starting in September. Yet the non-aligned reality of the US economy and a hawkish stance from the Fed brings forth a potential resurgence opportunity for the DXY Index in future trade sessions. Jerome Powell’s words at the Jackson Hole Symposium will be key.
- While the odds of a sharp 50 bps cut in September have come down, the market still anticipates nearly 100 bps of total easing by year-end.
- This also extends to 175-200 bps of easing over the impending 12 months.
DXY technical analysis: Bearish dominance persists as DXY Index exits sideways movement
Despite continuous efforts by the buyers, the DXY’s technical outlook has assumed a clearer bearish shade. The DXY Index came out of its sideways trading phase in the band of 102.50-103.30, which is a likely windfall for sellers. The momentum-oriented Relative Strength Index (RSI) took a major hit, falling into the oversold terrain with the Moving Average Convergence Divergence (MACD) manifesting increasing red bars. This firmly suggests an entrenched bearish dominance toward the DXY.
Support Levels: 101.50, 101.30, 101.20
Resistance Levels: 102.00, 102.50, 103.00
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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