US Dollar retreats as traders opt to take profits following Trump trade rally
- The Greenback trades on the back foot, giving back Thursday’s gains.
- Fed Chairman Jerome Powell surprised markets by casting doubts over December’s interest-rate cut.
- The US Dollar index falls back to the mid-106 level and could face further selling pressure.
The US Dollar (USD) declines on Friday, breaking a streak of five trading days of gains, as traders engage in profit-taking after the Trump-led rally pushed the Greenback to reach on Thursday its highest level this 2024.
The USD retreats even as traders are quickly paring back bets of another interest-rate cut by the US Federal Reserve (Fed) in December. The last blow came from Fed Chairman Jerome Powell, who in a speech on Thursday cast a shadow over the December rate cut odds by pointing out that the economy is doing great and the job market is looking healthy. Equities across the globe are not digesting this message too well, as this kills off the chances for a year-end Goldilocks scenario.
The US economic calendar is gearing up for the always-volatile US Retail Sales numbers. With the bigger sales season set to kick off with Black Friday and Christmas shopping, the healthiness of the US consumer preceding that season will be a driver for markets in the short term. The rule of thumb for Retail Sales remains that the revisions from previous months can be more impactful than the actual numbers.
Daily digest market movers: Fed delivers its first blow
- Fed Chairman Jerome Powell’s speech on Thursday came as a surprise to markets. While the Fed is said to remain data-dependent, several traders and strategists are pointing out that the Fed might already be pricing in a Trump trade effect.
- Boston Fed President Susan Collins told the Wall Street Journal in an interview that a December rate cut is not a done deal, while she does not see signs of price pressures.
- At 13:30 GMT, US Retail Sales for October are due. Growth in headline sales is expected to soften a touch to 0.3% from 0.4%. Sales excluding cars should also increase by 0.3% from the 0.5% rise a month earlier.
- Also at 13:30 GMT, the New York Empire State Manufacturing for November will come in. The number should come just below the contraction barrier, with a -0.7 expected, against the previous bigger contraction.
- Industrial Production for October is expected to come in at 14:15 GMT. Another monthly contraction of 0.3% is expected.
- Federal Reserve Bank of Boston President Susan Collins delivers welcome remarks at the 68th Economic Conference organized by the Boston Fed at 14:00 GMT.
- Federal Reserve Bank of New York President John Williams delivers opening remarks at the New York Fed Alumni event in New York near 18:15 GMT.
- Equities in Asia have closed off this Friday quite mixed. Japanese equities closed off on Friday on the front foot, while Chinese indices were on the back foot at the closing bell. US futures are sinking, with the Nasdaq flirting with a 1% loss early 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 58.7%. A 41.3% chance is for rates to remain unchanged. While the rate-cut scenario is the most probable, traders have significantly pared back some of the rate-cut bets compared with a week ago.
- The US 10-year benchmark rate trades at 4.43%, just off the high printed on Thursday at 4.48%.
US Dollar Index Technical Analysis: The logic side
The US Dollar Index (DXY) is undergoing a small fade this Friday, though warnings must be issued as comments from Powell are US Dollar positive. The Fed signals it will probably pause its cutting cycle, while for example the European Central Bank (ECB) will likely continue with still a string of rate cuts. This would widen the interest rate gap between the two nations, and will support the US Dollar as a high-yielding currency against other currencies.
From now on, the 107.00 round level remains in play going forward after the sharp rejection from Thursday. A fresh yearly high has already been printed at 107.07. A two-year high could be reached if 107.35 gets taken out.
On the downside, a fresh set of support is coming live. The first support is 105.93, the closing level on Tuesday. A touch lower, the pivotal 105.53 (April 11 high) should avoid any downturns towards 104.00.
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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