The US Dollar is moving higher after hitting a 2024 low

VaselineAugust 21, 2024

0 4 minutes read

The US Dollar is moving higher after hitting a 2024 low

The US dollar in an attempt to break a three-day losing streak.
The greenback is experiencing a technical rebound after testing key support levels.
The US dollar index is trading near 101.50 with a long road to recovery.

The US dollar (USD) is recovering again, trading in slightly positive territory on Wednesday after three consecutive sessions of sharp declines. The resource appears to be purely technical after the US dollar index (DXY) touched 101.30 in early Asian trade, the lowest since 2024.

On the economic data side, the minutes of the Federal Open Market Committee (FOMC) meeting for July will be released, although they are not expected to move the needle ahead of Jackson Hole on Friday. In addition to the FOMC minutes, the review of the Non-Farm Wage Benchmark could become interesting. Markets were rocked by the latest US Non-Farm Payrolls number on the first Friday of August, a data point that triggered the unwinding of the carry trade that had ripple effects on stocks and caused recession worries for the US economy. Although the revisions will not cover August, any major changes to previous numbers could still have some significance.

Digest Daily Market Moves: Vacuum up to Friday

At 14:00 GMT, the revision of the Nonfarm Payrolls Benchmark is due. The reviews will cover 12 months to March this year.
The US Treasury is due to issue a 20-year bond at 17:00 GMT.
At 18:00 GMT, the Fed will publish its minutes from the July meeting.
Asian equity markets are under a bit of pressure and are in the red, helping the US dollar strengthen a notch. European and US stocks are rising.
The CME Fedwatch tool shows a 69.5% chance of a 25 basis point (bps) interest rate cut by the Fed in September, compared to a 30.5% chance of a 50 basis point cut. Another 25bps cut (if September is a 25bps cut) is expected in November by 50.9%, while there is a 40.9% chance that rates will be 75bps below current levels and a likelihood of 8.2% for rates to be 100 basis points lower. .
The benchmark US 10-year yield is trading at 3.81%, marking a new low for the week.

Economic indicator

FOMC Minutes

FOMC stands for The Federal Open Market Committee which holds 8 meetings a year and analyzes economic and financial conditions, determines the appropriate stance of monetary policy and assesses risks to its long-term goals of price stability and sustainable economic growth. FOMC minutes are published by the Board of Governors of the Federal Reserve and are a clear guide to future US interest rate policy.

Technical Analysis of the US Dollar Index: Back to the Drawing Board

The US Dollar Index (DXY) is trying to snap the losing streak with some conviction. The pullback comes after the DXY hit a low seen on January 2, which is also the lowest this year. The question is whether this has room to go higher, given that there are no real meaningful data or market elements ahead of Friday’s Jackson Hole.

Defining pivot levels becomes very important to avoid any dead cat jumps, where traders pile into a trade too quickly and get caught on the wrong side of the fence once the course reverses. The first rise is 103.18, a level that traders could not hold last week. Next, a strong resistance level is at 103.99-104.00, and inches above is the 200-day Simple Moving Average (SMA) at 104.07.

On the downside, 101.30 (January 2 low) is trying to hold for now and has triggered a rally so far. Should it break, the December 28 low at 100.62 will be the ultimate level to watch.

US Dollar Index: Daily Chart

US Dollar FAQ

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 banknotes. It is the world’s most heavily traded currency, accounting for more than 88% of total global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, as of 2022. After World War II world, the USD has taken 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 disappeared.

The most important factor influencing the value of the US dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to ensure price stability (inflation control) and to promote full employment. Its main tool for achieving these two objectives 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, which helps the value of the USD. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which affects interest rates.

In extreme situations, the Federal Reserve can also print more dollars and engage in 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 (for fear of default). It is a last resort when simply lowering interest rates is unlikely to achieve the desired result. It was the Fed’s preferred weapon to combat the credit crunch that occurred during the Great Financial Crisis of 2008. This involves the Fed printing more dollars and using them to buy US government bonds, mainly 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 of maturing bonds it holds in new purchases. It is usually positive for the US dollar.

VaselineAugust 21, 2024

0 4 minutes read