US Dollar extends losses, focus on FOMC minutes
- DXY index falls to its lowest level since January.
- Markets continue to aggressively bet on a dovish Fed.
- Powell’s words on Friday at the Jackson Hole Symposium will guide the markets.
The US Dollar (USD), as measured by the US Dollar Index (DXY), exhibits no signs of recovery and declined near 101.15 during Wednesday's trading session. This is due to intense dovish bets on the Federal Reserve (Fed) and with US Treasury yields continuing to struggle.
The US economic outlook continues to project growth above trend, providing ample indication that the market may be overly optimistic about quick and aggressive rate cuts.
Daily digest market movers: US Dollar weak in anticipation of FOMC minutes and Jackson Hole Symposium
- The release of the FOMC Minutes from the July 30-31 meeting remains the focal market mover today.
- The Fed specified in its statement that it will not consider a rate reduction until it gains greater confidence in sustainable inflation movement toward the 2% target.
- Additionally, the Fed has raised concerns about the state of the labor market.
- These remarks set the stage for a cautious tone from Powell at the Jackson Hole meeting this Friday, suggesting a possible 25 bps cut in September.
DXY T]technical outlook: Bearish dominance persists, index at yearly lows
The DXY technical outlook remains predominantly bearish. Current analysis shows that the index broke the sideways trading regime in the 102.50-103.30 band and fell to a yearly low, which offers a good case for sellers.
The DXY index remains under significantly bearish domination as indicated by the oversold status of the Relative Strength Index (RSI) and the rising red bars shown by the Moving Average Convergence Divergence (MACD).
Support Levels: 101.00, 100.80, 100.50 Resistance Levels: 101.50, 101.80, 102.00
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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