- Initial Jobless Claims released by the US Department of Labor were slightly higher than expected.
- Unit Labor Costs from Q4 also came in weak.
- Markets await February’s Nonfarm Payrolls figures on Friday.
The US Dollar Index (DXY) dipped to the 103.1 level on Thursday, so far tallying a near 0.60% weekly decline. This downward movement can be attributed to the rise in Initial Jobless Claims for the week ending March 2 and the lower-than-expected Unit Labour Costs from Q4. On Friday, data on the Unemployment Rate, Average Hourly Earnings and NonFarm Payrolls from February arrive, and they will likely set the pace of the DXY in the short term.
In case the US reports additional labor market data on Friday, hopes of rate cuts arriving soon may add further pressure to the Greenback.
- ADP jobs report hints at fewer than anticipated jobs, but JOLTS suggests a tight labor market.
- For the week that ended on March 2, Initial Jobless Claims were mildly above the consensus at 217,000.
- Q4 Unit Labour Costs from the US were lower than anticipated, rising by 0.4% vs. the estimate of 0.6%.
- US Treasury bond yields continue to decline with 2-year yield falling to 4.54%.
- Markets still see the start of the easing of the Federal Reserve (Fed) in June. However, Friday’s data will shape those expectations.
The DXY’s technical aspects paint a rather bearish picture. The negative slope and territory of the Relative Strength Index (RSI) indicate weakening buying momentum. Concurrently, the Moving Average Convergence Divergence (MACD) is displaying red bars, a sign that sellers are taking control of the DXY’s direction.
In terms of price movement, the currency index stands below its 20,100 and 200-day Simple Moving Averages (SMAs). This position shows a broad-scale bearish outlook, as it typically signals an overall selling trend.
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.
