US Dollar drops to a near five-month low on geopolitical turmoil
- The US Dollar edges lower again, nearing a five-month low in the US Dollar Index.
- Traders brace for a historic vote in Germany on spending and a Trump-Putin phone call to end war in Ukraine.
- The US Dollar Index sinks to 103.00 and could snap under pressure once headlines emerge.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, dips lower again and trades pressured around 103.25 at the time of writing on Tuesday, near a five-month low at levels not seen since October. The move comes after several news headlines, increasing geopolitical uncertainty and key events taking place during the day. Any headline could be a catalyst to push the DXY to an even six-month low and below the 103.00 level.
On the geopolitical front, a high-stakes meeting between the United States (US) President Donald Trump and Russian President Vladimir Putin is scheduled this Tuesday, with the two parties set to discuss territory and divide up certain assets. This has raised concerns that Ukraine will be torn up and the European Union (EU) and North Atlantic Treaty Organisation (NATO) will be bolstered to boost even more their defense spending.
Meanwhile, Israel has broken this morning the ceasefire truce with Gaza that started in January by attacking Hamas’ tactical installations and buildings The military move comes after Israel and the US claimed Hamas did not hold its end of the bargain by releasing hostages. This will, in turn, possibly bring more attacks in the Red Sea by Houthi rebels and retaliation from Hamas.
The third big development is in German politics, with a vote on a €45 billion spending package for defense, which would spill over into the whole European industry. If an agreement and backing can be reached with the German Greens Party, a two-thirds majority would be present to get the plan through the Bundestag. Votes are expected to take place at 12:30 GMT.
On the economic data front, some US housing data is due, though the geopolitical headlines will remain the main drivers for this Tuesday.
Daily digest market movers: US data to be overshadowed
- At 12:30 GMT, several data points are set to be released:
- Monthly Building Permits are expected to reach 1.45 million in February, below the 1.473 million in January.
- Housing Starts for February is expected to reach 1.38 million compared to 1.366 million in January.
- The monthly Export Price Index is expected to contract by 0.2% in February, coming from a positive 1.3% in January. The Import Price Index is expected to contract by 0.1% compared to the January positive 0.3%.
- At 13:15 GMT, Industrial Production for February is due. It is expected to increase by 0.2% compared to 0.5% in January.
- Equities are mixed again on Tuesday, with European indices up nearly 1% on chances the German spending budget passes, while US futures are flat on the day.
- The CME Fedwatch Tool sees a 99.0% chance for no interest rate changes in the upcoming Fed meeting on Wednesday. The probability of a rate cut at the May meeting currently stands at 21.5%.
- The US 10-year yield trades around 4.30%, off its near five-month low of 4.10% printed on March 4.
US Dollar Index Technical Analysis: Time for 100.00 call?
The US Dollar Index (DXY) flirts with a breakdown of its recent range between 103.18 and 103.99 on Tuesday as downside pressure builds. With recent US economic data deteriorating and geopolitical events that would benefit the Eurozone, such as the possible approval in Germany to increase spending and the call between Trump and Putin for a ceasefire in Ukraine, another leg lower for the DXY could be a possible outcome.
Should markets consider current developments as ‘sell the rumour, buy the fact’, some surprise upside would initially materialize and see a return to 104.00. If bulls can avoid a technical rejection there, look for a large sprint higher towards the 105.00 round level, with the 200-day Simple Moving Average (SMA) converging at that point and reinforcing this area as a strong resistance. Once broken through that zone, a string of pivotal levels, such as 105.53 and 105.89, will present as caps.
On the downside, the 103.00 round level could be considered a bearish target in case US yields roll off again, with even 101.90 not unthinkable if markets further capitulate on their long-term US Dollar holdings.
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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