US Dollar steadies after geopolitical volatility
- The US Dollar Index recovers earlier losses, stabilizing around 106.50.
- Euro pares gains after CDU leads German elections, easing political uncertainty.
- Markets focus on upcoming US GDP and PCE data later this week.
- US President Donald Trump set to deliver a speech amid growing trade tensions.
The US Dollar Index (DXY), which measures the US Dollar’s (USD) performance against a basket of six major currencies, recovers on Monday after an initial downturn, stabilizing around 106.50. Early losses triggered by upbeat German election results faded as the Christian Democratic Union (CDU) secured a leading position, calming market fears.
Daily digest market movers: US Dollar steadies amid geopolitical and economic developments
- US Dollar Index recovers from Asian losses as German election results ease political concerns.
- Christian Democratic Union (CDU) leads the German elections, dampening Euro rally amid reduced political uncertainty.
- Investors await key US data releases, including Q4 2024 Gross Domestic Product (GDP) on Thursday.
- January Personal Consumption Expenditures (PCE) data set for release on Friday, potentially influencing the inflation outlook.
- Chicago Fed National Activity Index for January due later on Monday, offering insight into economic activity trends.
- US President Donald Trump is expected to speak later today, potentially addressing trade policy and tariffs.
- Tariffs set to take effect over the weekend could weigh on global trade sentiment.
- Personal income and spending data are expected alongside PCE figures for January.
- Q4 GDP figures are anticipated to confirm steady economic growth, supporting a positive outlook for 2025.
DXY technical outlook: Bullish momentum remains fragile
The US Dollar Index is attempting to stabilize around 106.50, with efforts to reclaim the 100-day Simple Moving Average (SMA) at 106.60 underway. Despite a mild rebound, technical indicators remain weak. The Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) suggest a continued bearish sentiment, though some recovery signs are emerging. Resistance lies at 107.00, while support remains firm around 106.00. A break above the 106.60 mark would signal a potential shift in momentum, but the bullish push remains fragile for now.
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.