US Dollar rallies to November highs, driven by hawkish Fed speakers
- Despite weak sentiment data, USD rides high on hawkish Fed bets.
- CPI data reported this week made hopes of a June cut unlikely.
- Fed’s Collins and Goolsbee were on the wires sounding hawkish.
The US Dollar Index (DXY) is trading above the 106.00 mark, attaining its highest level since early November. The Index's upward movement is largely driven by rising US yields and a hot inflation data environment that favors the US Dollar. In addition, Federal Reserve (Fed) officials expressed fewer possibilities for rate cuts this year, and an increase in hawkish bets is another driver boosting the currency.
On Wednesday, inflation measured by the US Consumer Price Index (CPI) accelerated in March, which made US Treasury yields rally, and markets are now expecting a more aggressive Fed.
Daily digest market movers: DXY shrugs off weak sentiment data on the back of hawkish bets
- Early April saw a decrease in US Consumer Confidence as indicated by the University of Michigan's Consumer Sentiment Index, which fell to 77.9 from March's 79.3, shyer than anticipated.
- Decreases were recorded in Sentiment Indices for both Current Conditions and Consumer Expectations, falling to 79.3 and 77 from 82.5 and 77.4, respectively.
- On Wednesday, the Consumer Price Index (CPI), reported by the US Bureau of Labor Statistics, rose to 3.5% YoY in March, a jump from February's 3.2%. The core CPI also accelerated.
- Because of heightened inflation figures, there is increased anticipation of a hawkish response from the Fed, which has led to a rise in US Treasury bond yields, subsequently strengthening the US Dollar (USD).
- Susan Collins, from the Boston Fed, pointed out that only two rate cuts could happen this year. Austan Goolsbee also warned that the Fed might take action if Personal Consumption Expenditures accelerates.
- The Odds of a July cut are reportedly less than 60%, a decrease from the prior 99% chance before the inflation data were publicized. The odds for a second rate cut happening in December stand at 75%.
- The market's hopes for a June rate cut also declined to around 20%.
DXY technical analysis: DXY bullish as momentum indicators favor buyers, correction likely
The indicators on the daily chart reflect a favorable buying momentum. The Relative Strength Index (RSI), with its positive slope and placement in positive territory, suggests that bulls are gaining ground in the currency price action. However, the RSI stands now in overbought terrain, which may hint that a correction is incoming.
Meanwhile, the Moving Average Convergence Divergence (MACD) also supports this bullish view as the green bars on the histogram show an upward trajectory, indicating that buyers are in control.
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.