US Dollar advances on risk-off flows, eyes on Jobless Claims on Thursday
- The US Dollar gained traction on Wednesday and trades strong against its main rivals.
- A negative market sentiment made the USD gain interest.
- The Fed's Beige report stated that there were no significant changes in economic activity since the September report.
- Building Permits in the US from September came in better than expected. Housing Starts disappointed.
- Thursday's focus will be weekly Jobless Claims released by the US Department of Labor.
The US Dollar (USD) measured by the US Dollar Index (DXY) rose to a high towards 106.60, then settled near 106.55 and seems to be building strong support around the 20-day Simple Moving Average (SMA). The Federal Reserve (Fed) Beige book didn't reveal any surprises in relation to the September report regarding economic activity. In addition, the US released mixed Housing data earlier in the session, which failed to have a significant impact in the USD.
The United States’ economic activity is holding strong, as revealed by the latest reports, including S&P Global PMIs, Industrial Production and Retail Sales. The Beige Book described the near-term outlook for the economy as "stable" or having a slightly weaker growth. It also revealed that consumer spending was mixed while labour market tightness continued to ease across the nation.
Daily Digest Market Movers: US Dollar gained interest, driven by a risk-off mood
- The US Dollar DXY at the time of writing, stands at 106.55, seeing 0.35% daily gains.
- The main global stock indexes are seeing sharp losses and investors seem to be seeking refuge in the USD.
- Building Permits from the US from September came in at 1.475M, higher than the 1.450M but still lower than the previous 1.541M.
- Housing Starts rose in September but lower than expected, coming in at 1.358M, lower than the 1.380M but above the last reading of 1.269M.
- In the meantime, US yields are slightly rising, and the 2, 5 and 10-year rates rose to around 5.20%, 4.92% and 4.91% respectively.
- According to the CME FedWatch tool, the odds of a 25 bps hike in the December meeting rose to nearly 42%.
Technical analysis: US Dollar Index’s bulls step in and present battle at the 20-day SMA
The DXY index managed to jump back above the 20-day Simple Moving Average (SMA) of 106.25, and technical indicators gained some ground on the daily chart on Wednesday. In the broader context, the index arguably remains in a bullish trend overall, holding above the key 200 and 100-day Simple Moving Averages (SMA).
With the Relative Strength Index (RSI) pointing north above 50 and the Moving Average Convergence Divergence (MACD) printing lower red bars – both are sending mildly supportive signals.
Supports: 106.20 (20-day SMA), 106.00, 105.80.
Resistances:106.70, 107.00, 107.30.
US Dollar FAQs
What is the US Dollar?
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.
How do the decisions of the Federal Reserve impact the US Dollar?
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.
What is Quantitative Easing and how does it influence the US Dollar?
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.
What is Quantitative Tightening and how does it influence the 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.