US Dollar firms as markets digest Fed outlook and economic data
- The US Dollar Index climbs on Thursday, holding within 103.00–104.00.
- Traders expect the Fed to stay on track with 2025 rate cuts.
- Geopolitical uncertainty drives safe-haven demand for US assets.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against a basket of currencies, is trading stronger against major peers on Thursday, avoiding further downside pressure. Traders remain focused on the Federal Reserve’s (Fed) latest policy stance, which reinforced expectations for two rate cuts in 2025. Despite stronger economic data, the index remains confined within the 103.00–104.00 range.
Daily digest market movers: US Dollar rises as Fed keeps rates steady and geopolitical risks intensify
- The Federal Reserve left interest rates unchanged, reaffirming projections for two rate cuts in 2025.
- Fed Chair Jerome Powell downplayed the inflationary impact of tariffs, calling it a temporary effect, but acknowledged the difficulty in assessing its broader implications.
- Recession risks have edged higher, though Powell indicated they remain relatively low for now.
- US jobless claims came in lower than expected, pushing the US Dollar higher above 104.00.
- Geopolitical uncertainty remains elevated, with no clear path to a ceasefire in Ukraine and tensions rising in Turkey and Gaza.
- US bond yields are falling as investors seek safety in Treasuries amid economic and geopolitical uncertainty.
- Expectations of lower yields once the Fed begins cutting rates are reinforcing demand for US bonds.
- European markets show mixed sentiment, while US stocks trade cautiously following the Fed’s policy decision.
Technical analysis: US Dollar Index stabilizes but remains below key resistance
The US Dollar Index continues to show signs of recovery, but upside momentum remains limited. The Relative Strength Index (RSI) is gradually moving higher, while the Moving Average Convergence Divergence (MACD) histogram remains in negative territory, though bearish pressure is easing.
Immediate resistance stands at 104.20, with further hurdles at 104.80 and 105.20. On the downside, 103.40 serves as the initial support, with a break lower exposing 102.90. Additionally, a bearish crossover between the 20-day and 100-day simple moving averages (SMAs) around 105.00 suggests a potential downside risk, which may act as a sell signal if sustained.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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