US Dollar moves slightly higher on inflation woes
- The US Dollar ticks up on inflation woes, with the Greenback consolidating at current levels.
- Inflation concerns take over and trigger a mini-crisis in UK Gilts.
- The US Dollar Index (DXY) resides and orbits around 109.00.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades roughly flat above 109.00 on Thursday while bond markets are coming off the boil for a minute. Yields surged across the globe after traders started to worry about r all the plans President-elect Donald Trump wants to implement, e most of them perceived as highly inflationary. This has triggered widening rate differentials between the US and other countries
The mentioned surges in yields triggered a brief mini-crisis in UK Gilts. This week, long-term UK borrowing costs have soared substantially and the British Pound (GBP) has fallen. Markets perceive this as a sign that investors have lost faith in the government’s ability to manage the national debt and control inflation.
The US economic calendar is light, with a shortened trading day due to the National Day of Mourning for former President Jimmy Carter. The US Challenger Job Cuts number for December will get most of the attention, while four Fed members are set to speak.
Daily digest market movers: Markets indigestion
- US stock markets will remain closed or will be trading in shortened hours this Thursday in honor of former President Jimmy Carter.
- The Fed Minutes released on Wednesday showed Fed officials confirming a gradual and possibly longer steady rate before considering to cut further, Bloomberg reported.
- At 14:00 GMT, Federal Reserve Bank of Philadelphia President Patrick Harker speaks in Princeton right before the National Association of Corporate Directors New Jersey Chapter Economic Forecast 2025.
- Around 17:40 GMT, the Federal Reserve Bank of Richmond Thomas Barkin speaks to the Virginia Bankers Association and the Virginia Chamber of Commerce.
- At 18:30 GMT, the Federal Reserve Bank of Kansas City President Jeffrey Schmid delivers a speech on the economic and monetary policy outlook at the Economic Club of Kansas City.
- Around 18:35GMT, the Federal Reserve Governor Michelle Bowman will give a speech at the California Bankers Association 2025 Bank Presidents Seminar about 2024 reflections, including monetary policy, economic performance and lessons for banking regulation.
- Equities are off to a rough start this Thursday with losses across the board
- The CME FedWatch Tool is projecting a 93.1% chance that interest rates will be kept unchanged at current levels in the January meeting. Further on, expectations are for the Fed to remain data-dependent with uncertainties that could influence the inflation path once President-elect Donald Trump takes office on January 20.
- US yields are softening a touch with the US 10-year benchmark at 4.673%, off the fresh nine -month high at 4.728% seen on Wednesday.
US Dollar Index Technical Analysis: Stalling and grinding
The US Dollar Index (DXY) seems to be stalling its rally just above 109.30 on Thursday. Although 110.00 is very near, the DXY might need to dip again back to 108.00 or lower in order to take out that 110.00 level in the next rally, as the market seems to have fully priced in all inflation elements for now.
On the upside, it is key that the green ascending trend line can hold as support, although that is often not the scenario going forward. If the DXY can head and break above the 110.00 psychological barrier, 110.79 becomes the next big level. Once beyond there, it is quite a stretch to 113.91, the double top from November 2023.
On the contrary, the first downside barrier is 107.35, which has now turned into support. The next level that might halt any selling pressure is 106.52, with the 55-day Simple Moving Average (SMA) at 106.63 reinforcing this region of support.
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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