US Dollar retreats with French yields pushing Euro higher
- The US Dollar extends this week’s decline on Black Friday.
- French budget talks are pushing the Euro higher, weighing on the US Dollar Index
- The US Dollar Index falls below 106.00 and tests the next support level for a rebound.
The US Dollar (USD) trades softer on Friday on the back of concerns over Europe, with the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, extending this week’s decline and falling below the 106.00 level.
France’s budget talks are not going well, with Prime Minister Michel Barnier having to consent to too many demands from the far-right National Rally from Marine Le Pen. The budget concerns are sending French yields higher, to levels matching weaker European peripheral countries such as Greece, fueling a stronger Euro over the US Dollar.
Meanwhile, US financial markets will close early on Friday after Thanksgiving Day. US equity futures are trading flat while the US bond market opens up under thin liquidity.
Daily digest market movers: Europe in the spotlight for all the wrong reasons
- Far-right National Rally leader Marine Le Pen, who holds outsize leverage in France’s split parliament, gave Prime Minister Michel Barnier until Monday to kneel to her budget demands before she decides whether to topple the government, Bloomberg reports.
- Prime Minister Barnier already agreed to abandon plans to raise taxes on electricity on Thursday, Reuters reports.
- Equities are mixed, with European equities marginally in the red, while US futures are flat to a touch higher on the day.
- The CME FedWatch Tool is pricing in another 25 basis points (bps) rate cut by the Fed at the December 18 meeting by 66.3%. A 33.7% chance is for rates to remain unchanged. The Fed Minutes have helped the rate cut odds for December to move higher.
- The US 10-year benchmark rate trades at 4.22%, falling to this week’s low at the start of this Friday after being closed on Thursday.
US Dollar Index Technical Analysis: France, the next sick man in Europe
The US Dollar Index (DXY) faces some more selling pressure on Friday, with one of its main components, the Euro, weighing the Index down. With the uprising in French yields and spreads, the rate gap between the US and Europe gets narrower, with the Euro catching up with the US Dollar. Pivotal support levels need to be identified, with the “Trump trade” set to pick up soon again as President-elect Donald Trump takes office in January.
With this week’s decline in the DXY, former support levels have now turned into resistance. On the upside, 106.52 (April 16 high) is the first level to watch. Should the Dollar bulls reclaim that level, 107.00 (round level) and 107.35 (October 3, 2023, high) are back on target for a retest.
If the DXY correction continues, the pivotal level at 105.53 (April 11 high) comes into play on Friday as the last man standing before heading into the 104-region. Should the DXY fall all the way towards 104.00, the big figure and the 200-day Simple Moving Average at 104.03 should catch any falling knife formation.
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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