- The US Dollar is in the red with Japanese Yen leading the charge against the Greenback.
- Market sentiment becomes unclear with investors awaiting further data in pivotal week.
- The US Dollar Index is on the back foot and heads to the mid-103 level.
The US Dollar (USD) is mildly in the red, trading overall is down against most major peers, especially the Japanese Yen, which is nearly 0.50% stronger against the Greenback. The move comes on the back of the Japanese inflation print which came out higher than expected.
On the economic front the week is starting to heat up with Durable Goods and a few sentiment indices ahead. Markets already heard Kansas City Federal Reserve Bank President Jeffrey Schmid, who said that the Fed should be patient and not adjust its policy preemptively. Later this Tuesday Michael Barr and Fed’s Vice Chair will make comments as well.
- Kansas City Fed Jeffrey Schmid already kicked off this Tuesday with early comments, saying that the Fed should wait and not jump the gun on its disinflationary path.
- Around 13:30 GMT Durable Goods for January are due to be released:
- Headline Durable Goods Orders are expected to head from 0% to -4.8%.
- Orders without Transportation are seen heading from 0.5% to 0.2%.
- As always, the previous revisions will be more important in terms of market reaction on the numbers.
- At 13:55 the weekly Redbook will be released, with 3% as the previous number.
- Near 14:00 the Housing Price Index for December will be released, with a steady 0.3% forecasted.
- Fed Vice Chairman Michael Barr will make some comments around that same time as the Housing Price Index release.
- Fast forward to 15:00 and the Consumer Confidence for February will be released. Previously it was at 114.8 with 115 projected. Additionally, the Richmond Fed Manufacturing Index for february will be released at that same time, with -15 printed previously and -4 forecasted.
- Last number for this Tuesday will be released at 15:30 with the Dallas Fed Manufacturing Business Index for February, previously in contraction at -27.4.
- Equities are mildly in the green after the Dow Jones snapped its three-day winning streak overnight. China is doing rather well, with both the Hang Seng and the Shenzhen Index both up near 1%. European equities are mildly in the green with US futures still looking for direction.
- According to the CME Group’s FedWatch Tool, expectations for a Fed pause in the March 20 meeting are at 97.5%, while chances of a rate cut stand at 2.5%.
- The benchmark 10-year US Treasury Note trades around 4.26%, and is dipping to session lows for this Tuesday.
The US Dollar Index (DXY) is having a difficult Tuesday where a handful of currencies are appreciating against the US Dollar, with the Japanese Yen leading the charge. This has pushed the DXY below the 200-day Simple Moving Average (SMA) at 103.73. The Durable Goods print this Tuesday could be enough of a catalyst to push the DXY all the way down to test 103.00.
To the upside, the 100-day Simple Moving Average (SMA) near 104.02 is the first level to watch as it is a support that has been turned into a resistance. Should the US Dollar be able to cross 104.60, 105.12 is the next key level to keep an eye on. One step beyond there comes 105.88, the high from November 2023. Ultimately, 107.20 – the high of 2023 – could even come back into scope, but that would be when markets reprice the timing of a Fed rate cut again, possibly delaying it to the last quarter of 2024.
Looking down, the 200-day Simple Moving Average at 103.73 was broken on Thursday and sees more US Dollar bears flock in to trade the break. The 200-day SMA should not let go that easily, so a small retreat back to that level could be more than granted. Ultimately, it will lose its force with the ongoing selling pressure and could fall to 103.16, the 55-day SMA before testing 103.00 as a level.
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.
