US Dollar pushes back against the latest decline on Friday
- The US Dollar ticks up against all its peers across the board.
- European PMI data revealed a slowdown in business activity ahead of the German election on Sunday.
- The US Dollar Index (DXY) reverses course and tries to head back to 107.00.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, pushes back on its recent decline and trades slightly below 107.00 at the time of writing on Friday. The Greenback claws back ahead of the United States (US) preliminary Purchasing Managers Index (PMI) data release for February. European data released earlier in the day already revealed a further slowdown in the economic activity in Europe.
The US economic calendar finally offers some data releases that might move the Greenback. The preliminary S&P Global Services PMI for February will be the main driver this Friday. Expectations are for a small uptick to 53 against 52.9 in the January reading. The University of Michigan will release its Consumer Sentiment Index and Inflation expectations as well for January’s final reading.
Daily digest market movers: Does it matter?
- In the early European trading session, the preliminary Purchasing Managers Index (PMI) data for February was already released in several European countries. What stood out:
- French HCOB Services PMI fell further into contraction to 44.5, missing the 48.9 estimate and contracting further from the previous 48.2.
- European HCOB Services PMI fell to 50.7, missing the 51.5 estimate and below the previous 51.3 reading.
- German HCOB PMIs beat estimates despite the Services component that came in at 52.2, missing the 52.5 estimate and below the January 52.5 reading.
- At 14:45 GMT US preliminary S&P Global PMI data for February will be released:
- The manufacturing sector is expected to tick up to 51.5, coming from 51.2.
- The services sector should tick up marginally to 53.0, coming from 52.9.
- The University of Michigan will release its final January reading at 15:00 GMT:
- The Consumer Sentiment Index should remain stable at 67.8.
- The 5-year Consumer Inflation Expectation index should rise steadily by 3.3%.
- Equities are shooting higher, led by the Chinese semiconductor sector. Chinese technology stocks surged the most in three years, driven by optimism over Alibaba Group earnings.
- The CME FedWatch tool shows a 47.5% chance that interest rates will remain unchanged at current levels in June.
- The US 10-year yield trades around 4.49%, slipping lower from its Wednesday’s high of 4.574%.
US Dollar Index Technical Analysis: Greenback just does not care
The US Dollar Index (DXY) is able to reclaim a little bit of room after another downbeat performance this week. The Euro (EUR) is helping out, with the partial recovery in the DXY index this Friday after some disappointing PMI releases, especially from France. If the US preliminary S&P Global PMI data for February, due this afternoon, shows some resilience for the country’s activity, the DXY could quickly be back up at 107.00.
On the upside, the previous support at 107.35 has now turned into a firm resistance. Further up, the 55-day SMA at 107.96 must be regained before reclaiming 108.00.
On the downside, 106.60 (100-day SMA) and 106.52 (April 16, 2024, high) have acted as an alert for buyers to step in and push the DXY back up. Further down, 105.89 (resistance in June 2024) will still hold as the next firm support level. The Relative Strength Index (RSI) momentum indicator in the daily chart still has not touched the oversold barrier. Therefore, the 200-day SMA at 104.98 could be a possible outcome if a firm catalyst emerges.
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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