US Dollar sees moderate gains despite soft labor market data
- USD manages to hold its ground on Tuesday after sharp losses on Monday due to disappointing May ISM PMIs.
- JOLTS for April reported a lower-than-expected job opening.
- Markets await upcoming Nonfarm Payrolls report and wage growth data for further insights into the Fed's policy outlook.
On Tuesday, the US Dollar Index (DXY) saw moderate gains despite soft labor market data reported by the US Bureau of Labor Statistics. The previously bearish market environment, fueled by weak Institute for Supply Management (ISM) PMI data for May, appeared to stabilize. That being said, the market seems to be building concerns around a weakening US economy that might prompt the Federal Reserve (Fed) to cut rates sooner.
Market attention has now shifted to additional labor market data that will include ADP Employment Change figures, Nonfarm Payrolls, Wage inflation, and Unemployment data for May, which will give additional insights into the US economy.
Daily digest market movers: USD holds ground despite soft JOLTS data
- Markets displayed unease with the JOLTS report indicating fewer job openings in April.
- Job openings in April were reported to be 8.059 million, lower than both the expected 8.34 million and March's revised figure of 8.35 million, according to data released on Tuesday by the BLS.
- Falling job openings contributed to the market's wariness, escalating speculation of a Fed interest rate cut in September to nearly 60%.
- Upcoming Nonfarm Payrolls report for May and wage growth data will be crucial in further influencing the Fed's future policy direction.
DXY technical analysis: US Dollar sees short relief despite negative indicators
Despite the slight gains on Tuesday, the DXY outlook continues to be negative. Indicators such as the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) remain in negative territory, reflecting persistent bearish sentiment and selling pressure.
After falling below the 20,100 and 200-day Simple Moving Averages (SMAs), the overall trend has turned in favor of the sellers.
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.