US Dollar weakens after disappointing ISM and S&P Services data
- US Dollar Index declines toward 106.10 on Wednesday.
- Soft services data seems to be pushing the USD lower.
- Market attention will turn to Fed Chair Powell’s words late in the American session.
The US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, declined toward 106.10 on Wednesday amidst slight profit-taking after steep rallies against many major G20 currencies this week.
Profit taking and soft ISM PMIs seem to be the reasons for the USD weakness. However, the Buck might get bailed out by Federal Reserve (Fed) Chair Jerome Powell’s words later in the American session.
Daily digest market movers: US Dollar declines against major rivals after soft ISM Services figures
- The ISM Services PMI fell to 52.1 in November, a decline of 3.9 points compared to the previous month.
- The PMI reading missed market expectations of 55.5 and marked a significant drop from October's level of 56.
- The decline in the Services PMI suggests a slowdown in the growth of the US services sector.
- Later in the session, the Fed Beige Book report is expected to reflect a similar economic outlook to the previous report, which showed ‘moderate growth’ in the US economy.
DXY technical outlook: DXY tests the 20-day SMA, break below could worsen short-term outlook
The US Dollar Index is facing a potential turning point as it approaches the 20-day Simple Moving Average (SMA). A break below this key level could worsen the short-term outlook for the index, as it has recently lost some momentum.
Technical indicators are sending mixed signals, with the Relative Strength Index (RSI) remaining in bullish territory but the Moving Average Convergence Divergence (MACD) showing red bars. Resistance levels at 107.00 and 108.00 may pose challenges, while support is expected at 106.00-106.50. Overall, while the DXY is facing some headwinds, the bullish trend remains strong.
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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