US Dollar eases further as risk appetite returns to markets
- The US Dollar eases on Monday as markets embrace a very quiet weekend on the geopolitical front.
- Tensions in the Middle East ease substantially, triggering a rally in equities.
- The US Dollar Index holds onto recent gains around 106.00, but downside pressure is mounting.
The US Dollar trades broadly steady on Monday, with markets having a sigh of relief after the weekend remained fairly calm as there was no further retaliation from Iran towards Israel. The de-escalation provides fuel to risk assets, particularly equities, to rally higher this Monday. With the risk-on tone, the Greenback might have some further room to ease.
On the economic data front, Monday’s calendar is very thin ahead of the US Gross Domestic Product (GDP) release on Thursday and the US Personal Consumption Expenditures Price Index (PCE) numbers on Friday. The latter is the most important for this week as the PCE is the Federal Reserve’s preferred inflation gauge and another red hot print might lead markets to price in a rate hike before considering any cuts.
Daily digest market movers: Enjoy it for now
- The Chicago Fed National Activity Index will be released at 12:30 GMT. The previous reading, for February, was at 0.05.
- The US Treasury is auctioning a 3-month and a 6-month bill at 15:30 GMT.
- In the commodity space, both Oil and Gas futures are falling as the tensions in the Middle East ease.
- Equity markets are having a sigh of relief. Asian equities are overall trading up by 1% in both Japan and China. European equities are in line with US equity futures, up near 0.5% on the day.
- According to the CME Group’s FedWatch Tool, expectations are further cementing for a no-change to the Fed’s monetary policy in June, with a small 17% chance for a rate cut.
- The benchmark 10-year US Treasury Note trades around 4.64%, recovering further after its decline on Friday to 4.50%.
US Dollar Index Technical Analysis: Rate differential remains main driver
The US Dollar Index (DXY) is facing a little bit of selling pressure at the start of this week. More and more traders are trying to sell the peak in the DXY, with the idea that the Greenback could fall back to lower levels seen in the first three months of this year near 104.00-105.00. With the PCE inflation numbers right at the end of this week, some easing might be taking place until PCE could trigger a turnaround if there is an upbeat surprise.
On the upside, the fresh Tuesday’s high from last week at 106.52 is the level to beat. Further up and above the 107.00 round level, the DXY Index could meet resistance at 107.35, the October 3 high.
On the downside, the first important level is 105.88, a pivotal level (since March 2023 with the peaks from November 2023 and recent support as drivers) . Further down, 105.12 and 104.60 should also act as support ahead of the region with the 55-day and the 200-day Simple Moving Averages (SMAs) at 104.17 and 103.91, respectively.
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.