US Dollar declines on quiet Monday, markets await drivers
- The US Dollar Index softens towards 107.00.
- Profit-taking after steep rallies in November pressured Greenback lower.
- Expectations for a lower U.S. corporate tax rate and a wave of deregulation should boost foreign portfolio and FDI flows to the US.
The US Dollar Index (DXY) retreated from its fresh two-year high on Friday, softening towards 107.00. The US calendar won’t feature any major highlights on Monday’s session.
The US Dollar Index (DXY) remains bullish despite a recent pullback from a two-year high. Strong economic data and a less dovish Federal Reserve stance support the index's upward trajectory. In addition, geopolitical jitters from the Russian-Ukraine war has contributed to the upside.
Daily digest market movers: US Dollar firm despite pullback, Trump’s policies might favor the upside
- The robust U.S. economy is outperforming other advanced economies.
- Trump's proposed policies will likely prolong Fed's restrictive policy and the US is anticipated to see increased foreign investment due to potential tax cuts and deregulation.
- Higher real interest rates are predicted due to the U.S.'s favorable productivity landscape.
- For the rest of the week, investors will eye Gross Domestic Product (GDP) and Personal Consumption Expenditures (PCE) figures to be released on Thursday and Friday as they might shake the USD’s ground.
- Jobless Claims on Thursday will also be important.
DXY technical outlook: Index consolidates after retreat from highs, bullish bias intact
Technical indicators suggest a possible consolidation period due to overbought conditions, with the Relative Strength Index (RSI) easing from overbought levels and the Moving Average Convergence Divergence (MACD) histogram contracting. Despite the consolidation, the overall bullish trend remains intact, with resistance at 108.00 and support at 106.00-106.50 area. Bulls must hold this area to maintain the bullish momentum.
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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