- The US dollar managed to maintain resistance against its main rivals on Tuesday.
- The US dollar index is holding on to modest daily gains after Monday’s recovery.
- April inflation data from the US could trigger another big reaction in the USD.
The US dollar (USD) shook off selling pressure earlier in the week and the US dollar index (DXY) closed in positive territory on Monday. The dollar held its ground early Tuesday as market participants refrained from taking large positions ahead of highly anticipated April US inflation data. United States (USA), which will be published on Wednesday.
NY Federal Reserve President John Williams will deliver a speech later in the session. However, USD valuations are likely to continue to be driven by risk perceptions, at least in the near term.
Daily overview of market movements: US dollar benefits from safe flows
- The NFIB Business Optimism Index fell to 89 in April from 90.1 in March. This figure was slightly below market expectations of 89.6.
- The IBD/TIPP Index of Economic Optimism fell slightly to 41.6 in May from 47.4 in April, compared with analysts’ estimate of 48.2.
- “The rate of inflation has started to come down. The economy has started to slow down in an orderly way … The economy will have an opportunity to continue to expand,” Fed Governor Philip Jefferson said on Tuesday.
- In its first-quarter Loan Officer Survey, the Fed noted that respondents reported tighter standards and weaker demand for commercial and industrial (C&I) loans for large and mid-sized firms. “Banks reported tighter standards and weaker demand for all categories of commercial real estate loans,” the publication continued.
- In an interview with Yahoo Finance on Monday, Chicago Fed President Austan Goolsbee reiterated that it’s too early to tell what the next policy move will be, explaining that there are many uncertainties about the impact of credit tightening on the economy.
- The benchmark 10-year U.S. Treasury yield extended its rally for a third straight day on Monday, gaining nearly 2%. The 10-year yield is correcting lower Tuesday morning and remains slightly below 3.5%.
- Wall Street’s major indexes closed mixed on Monday, with the Dow Jones Industrial Average (DJIA) losing 0.17% and the Nasdaq Composite rising 0.25%.
- The S&P 500 opened lower on Tuesday, with the DJIA opening the day near Monday’s closing level.
- According to CME Group’s FedWatch Tool, markets are pricing in an 88% chance that the Fed will leave the key interest rate unchanged in June.
- The U.S. Bureau of Labor Statistics (BLS) reported on Friday that nonfarm payrolls rose by 253,000 in April, well above market expectations of 179,000. On the downside, March’s 236,000 increase was revised lower to 165,000.
Technical analysis: The US dollar index has cleared a key hurdle
The US dollar index (DXY) advanced past 101.60, where the 20-day simple moving average (SMA) is located. A daily close above this level could attract buyers and open the door for an extended recovery towards 102.00 (psychic level), 102.40 (May 2 high) and 103.00 (100-day SMA).
On the downside, 101.00 (static level, psychological level) aligns as first support before 100.00 (psychological level, static level) and 99.50 (static level since March 2022).
It is also worth noting that the Relative Strength Index (RSI) indicator on the daily chart is still below 50, indicating that the bullish momentum is not yet strong enough for a stable rebound.
Frequently asked questions about the US dollar
What is the US dollar?
The United States dollar (USD) is the official currency of the United States of America and the “de facto” currency of a large number of other countries where it circulates alongside local banknotes. It is the most traded currency in the world, accounting for more than 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
After World War II, 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 was abolished.
What impact do Federal Reserve decisions have on the US dollar?
The most important factor affecting the value of the US dollar is monetary policy, which is shaped by the Federal Reserve System (Fed). The Fed has two mandates: to achieve price stability (control inflation) and to promote full employment. Its primary tool to achieve these two goals is the adjustment of interest rates.
When prices rise too fast and inflation is above the Fed’s 2% target, the Fed will raise rates, helping the value of the USD. When inflation falls below 2% or the unemployment rate is too high, the Fed can cut interest rates, weighing on the dollar.
What is quantitative easing and how does it affect 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 troubled financial system.
This is a non-standard policy measure used when credit has dried up because banks will not lend to each other (for fear of counterparty default). It is a last resort when simply cutting interest rates is unlikely to achieve the desired result. It was the Fed’s weapon in fighting the credit crunch that occurred during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, mostly from financial institutions. QE usually leads to a weaker US dollar.
What is quantitative tightening and how does it affect the US dollar?
Quantitative tightening (QT) is the opposite process in which the Federal Reserve stops buying bonds from financial institutions and does not invest the principal of the bonds it holds in new purchases. It is usually positive for the US dollar.