US Dollar rises as sellers take a breather, political jitters
- US Dollar is gaining strength after Fed decision volatility.
- New York Fed's Nowcast model predicts robust economic growth in third and fourth quarters.
- Fed expects financial conditions to remain loose, supporting economy.
The US economy is experiencing a moderate slowdown, but indicators suggest that economic activity remains robust overall. The Federal Reserve (Fed) has indicated that the pace of its interest rate increases will be determined by economic data.
The upcoming US election will have wide ranging impacts across financial markets, but for now the US Dollar is holding its ground. However, dovish bets on the Fed remain steady and might limit the USD.
Daily digest market movers: US Dollar rises ahead of the weekend on market optimism
- Market optimism is driving the US Dollar higher ahead of the weekend.
- The market is expecting robust growth in Q3, with the New York Fed's Nowcast model tracking Q3 growth at 2.6% SAAR and Q4 growth at 2.2% SAAR.
- Fed is likely pleased that the market is helping to keep financial conditions loose, which should help the economy avoid a hard landing.
- Despite the Fed's efforts to push back against market easing expectations, they have intensified.
- After initially lowering its expectations following the decision, the market is now factoring in an additional 75 basis points of rate cuts by the end of the year.
- Even more unexpected is that the market anticipates close to 250 basis points of further cuts over the next year, which would bring the fed funds rate significantly below the neutral level.
DXY technical outlook: DXY bullish momentum waning, technicals remain bearish
The DXY index has gained some upside momentum, but technical indicators remain bearish.
The Relative Strength Index (RSI) is at 40, near oversold conditions, while the Moving Average Convergence Divergence (MACD) is printing decreasing green bars, implying weak buying pressure.
These indicators suggest that bears are in control and that the index is likely to continue its downtrend.Supports: 100.50, 100.30, and 100.00Resistances: 101.00, 101.30, and 101.60
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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