US Dollar broadly consolidates in calm start of week
- The US Dollar trades flat to mildly up as the possible escalation in the Middle East conflict drives flows towards the Greenback.
- Fed speakers are starting to align with market expectations for gradual to no rate cuts in the near future.
- The US Dollar Index rally could pick up steam if Donald Trump leads further in the polls.
The US Dollar (USD) opens broadly flat on Monday as three main factors provide some support for the Greenback. The first one is geopolitics, with Israel’s Prime Minister Benjamin Netanyahu vowing to step up retaliations after an Iranian drone struck near his private residence over the weekend. The second driver is coming from the Federal Reserve (Fed) after a few of its officials called for a gradual approach to reduce interest rates (or even no rate cuts) in order to retain control of inflation. Finally, the third driver is the upcoming US presidential election on November 5 with a small lead on the betting websites for former US President Donald Trump, which supports a stronger US Dollar.
The US calendar is very light in terms of economic data on Monday. Besides the US Treasury set to issue some more debt into the markets, four Fed members will speak. Markets will want to look for further confirmation from the Fed on the rate cut projections for the meetings in November and December after Atlanta Fed President Raphael Bostic said last week that the Fed should refrain from cutting.
Daily digest market movers: The ball is rolling
- Federal Reserve Bank of Dallas President Lorie Logan is set to speak at 12:55 GMT. Logan participates in a conversation at the 2024 SIFMA (Securities Industry and Financial Markets Association) Annual Meeting.
- At 17:00 GMT, Federal Reserve Bank of Minneapolis President Neel Kashkari participates in a town hall event hosted by the Chippewa Falls Chamber of Commerce in Chippewa Falls, Wisconsin.
- At 21:05 GMT, Federal Reserve Bank of Kansas City President Jeffrey Schmid delivers remarks about the US economic and monetary policy outlook at an event organized by the Chartered Financial Analyst Society in Kansas City.
- Federal Reserve Bank of San Francisco President Mary Daly is set to participate in a moderated Q&A session with the Wall Street Journal's Nick Timiraos at the 2024 WSJ Tech Live at 22:40 GMT.
- Equities are taking a breather on Monday and are looking for a direction. Minor gains or losses overall, with just the Chinese Hang Seng closing down by more than 1.5% on Monday.
- The CME Fed rate expectation for the meeting on November 7 shows a 92.3% probability of a 25 basis points (bps) rate cut, while the remaining 7.7% is pricing in no rate cut. Chances for a 50 bps rate cut have been fully priced out.
- The US 10-year benchmark rate is trading at 4.09% after having flirted with a break below 4% on Wednesday.
US Dollar Index Technical Analysis: The beginning of something big
The US Dollar Index (DXY) holds strong near last week’s peak. Expectations of a gradual approach to interest rate cuts by the Fed would support a stronger US Dollar. More upside could take place should former President Donald Trump take a further lead in the polls or gain a swing state majority, or should geopolitical tensions in the Middle East swirl further out of control.
A firm resistance ahead is 103.80, which aligns with the 200-day SMA. Above that, there is a small gap before hitting the pivotal level at 103.99 (the June 4 low) and the 104.00 big figure. Should geopolitical tensions increase or Trump further lead in the polls, a rapid swing up to the 105.00 round level and 105.53 (the April 11 high) could be on the cards.
On the downside, the 100-day SMA at 103.19 and the pivotal level at 103.18 (the March 12 high) are now acting as support and should prevent the DXY from falling lower. With the Relative Strength Index in overbought territory, a test on this level looks granted. Further down, the 55-day SMA at 101.86 and the pivotal level at 101.90 (the December 22, 2023, high) should avoid further downside moves.
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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