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4 Jun 2024
US Dollar reemerges after downbeat start of the week
- The US Dollar trades in the green against its peers, recovering some of the losses registered on Monday
- Equity markets are erasing their positive start of the week.
- The US Dollar Index jumps back above 104.00 after falling below it during the Asia-Pacific trading session.
The US Dollar (USD) trades in the green on Tuesday in an attempt to recoup Monday’s losses. The Greenback is rallying supported by substantial safe-haven inflows as most major equity markets are in the red. The move sparked during the Asian trading session, with the Indian Nifty index falling over 5%, as Prime Minister Narendra Modi’s victory appears to be narrower than what polls were predicting.
On the economic front, all eyes are on some important indicators that could further confirm the slightly downbeat sentiment surrounding the US economy. The main event will be the US JOLTS Job Openings report for April. Although this is a lagging number, job openings have been decreasing for several months in a row and a further decline could further confirm the end of that US exceptionalism.
Daily digest market movers: JOLTS as appetiser
- The Redbook Index for this week will be published at 12:55 GMT. The previous number showed a 6.3% increase.
- At 14:00 GMT, the JOLTS survey will be released.
- Job Openings in April are expected to fall further to 8.34 million from 8.488 million a month earlier.
- Factory Orders for April are expected to increase 0.6% in April, slowing from the 1.6% rise seen in March.
- The TechnoMetrica Institute of Policy and Politics (TIPP) will release its Economic Optimism Index for June. The index is expected to increase to 45.2 from 41.8 in May.
- Equities are falling across the globe with the more than 5% sell-off in Indian equities. European indices are down near 1%, while US equity futures are losing less than 0.50%.
- According to the CME Fedwatch Tool, Fed Fund futures pricing data suggests a 38.4% chance for keeping rates unchanged in September, against a 52.6% chance for a 25 basis points (bps) rate cut and a 8.9% chance for an even 50 bps rate cut. An interest rate hike is no longer considered an option since this week. For the upcoming meeting on June 12, futures are fully pricing in an unchanged result.
- The benchmark 10-year US Treasury Note trades around 4.38%, and is near its monthly low at 4.34%.
US Dollar Index Technical Analysis: Up for the wrong reasons
The US Dollar Index (DXY) is seeing Dollar bulls fighting with knives between their teeth. The DXY might be popping back up above 104.00 this Tuesday, but this would happen for all the wrong reasons. Simply because equities are heading lower, the US Dollar is seeing some safe-haven flows. The recent appreciation should not be seen in correlation with the recent softening in the US economy, which could still bring more easing in the Greenback over the coming weeks and months.
On the upside, the DXY first faces the double belt of resistance in the form of the 200-day Simple Moving Average (SMA) at 104.43 and the 100-day SMA at 104.42. Next up, the pivotal level near 104.60 comes into play. Topside for now is forming around 105.00, with the 55-day SMA at 105.00 and the peak from recent weeks at 105.12.
On the downside, the Greenback is trading in that air pocket area in which the 104.00 big figure looks to be holding. Once through there, another decline to first 103.50 and even 103.00 are the levels to watch. With the Relative Strength Index (RSI) still not trading in the oversold level, more downside room is still under consideration.
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.