US Dollar strengthens following encouraging labor market data, higher US Treasury yields
- DXY Index recovers and flirts with November highs.
- Initial Jobless Claims data came out slightly lower than expected.
- Fed’s stance remains hawkish, persistently increasing pressure on US yields.
The US Dollar Index (DXY) rose toward 106.25 on Thursday and appears on track to test the November 1 high near 107.10. What is underpinning this rise is the Federal Reserve's (Fed) hawkish stance, along with a related recovery of US Treasury yields. Low Jobless Claims also benefited the US Dollar.
The US economy remains resilient, showing stubborn inflation and a strong economy. This has made the Fed adopt more hawkish messaging, and markets are delaying the start of the easing cycle.
Daily digest market movers: DXY demonstrates persistent growth coupled with robust inflation
- Fed remains committed to a hawkish stance, given ongoing inflation and robust growth in the US.
- Fed officials on Thursday spoke cautiously, asking for patience in regard to interest rate cuts.
- Market forecasts for the Fed's upcoming meeting showed an important shift and the chances for a rate cut in June have plunged to 20%, while the possibility for a rate cut in July dropped to 50%. Current estimates suggest a likely first cut in September with a 75% probability of a second one in December.
- The US Treasury bond yields show an upward trend for the 2-year, 5-year, and 10-year bonds, currently at 4.98%, 4.68% and 4.64%, respectively.
- On the data front, weekly Jobless Claims came in at 212K, lower than the 215K expected, adding arguments for a strong labor market.
DXY technical analysis: DXY bulls step in and recover ground
The indicators on the daily chart reflect a positive bias for DXY. The Relative Strength Index (RSI) has a positive slope, sitting comfortably in positive territory. This implies an underlying bullish momentum. Complementing this bullish bias is the Moving Average Convergence Divergence (MACD), which shows rising green bars, contributing to the overall buying sentiment.
As for the Simple Moving Averages (SMAs), the DXY pair remains above the 20, 100, and 200-day SMAs, inferring that buying momentum is strong. Adding to this bullish scenario is the ongoing resilience of the bulls, further grounding positive sentiment.
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.