The US Dollar (USD) stabilizes on Friday after a very solid rally this week, with the rate differential becoming the main driver. The question going forward for next week will be if this upward move in US Treasury rates was a bit overdone, seeing the US Consumer Price Index (CPI) only marginally ticked up in September compared to the previous month. This contradicts what several Federal Reserve (Fed) officials have said this week, that US rates will go lower with more interest rate cuts from the Fed confirmed.
The economic calendar is facing this week's last pieces of the puzzle. The US Producer Price Index (PPI) release for September will reveal whether the uptick in inflation is also noticeable on the production side. The last data point will be the preliminary reading from the University of Michigan on Consumer Sentiment and inflation expectations for October.
The US Dollar Index (DXY) has had a quick sprint higher this week, with markets repositioning in the idea that interest rate cuts might be a certainty for the remainder of 2024. Although Fed officials are still very vocal on more rate cuts to come, the current move in US Treasury rates does not match with that message from the Fed. Either markets completely price out any rate cuts for 2024, which would mean the DXY break above 103.00, or it fades from here with US rates falling lower.
The psychological 103.00 is the first level to tackle on the upside. Further up, the chart identifies 103.18 as the very final resistance level for this week. Once above there, a very choppy area emerges, with the 100-day Simple Moving Average (SMA) at 103.26, the 200-day SMA at 103.77, and the pivotal 103.99-104.00 levels in play.
On the downside, the 55-day SMA at 101.91 is the first line of defence, backed by the 102.00 round level and the pivotal 101.90 as support to catch any bearish pressure and trigger a bounce. If that level does not work out, 100.62 also acts as support. Further down, a test of the year-to-date low of 100.16 should take place before more downside. Finally, and that means giving up the big 100.00 level, the July 14, 2023, low at 99.58 comes into play.
US Dollar Index: Daily Chart
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.