US Dollar Index (DXY) Remains Lower Below 101.00, One Week Low Ahead of NFP

VaselineSeptember 6, 2024

0 3 minutes read

US Dollar Index (DXY) Remains Lower Below 101.00, One Week Low Ahead of NFP

The DXY edged lower for a third straight day and fell to a more than one-week low on Friday.
Bets on a bigger Fed rate cut are keeping US bond yields lower and putting some pressure on them.
Investors are now eagerly awaiting the key US NFP report before placing new directional bets.

The US Dollar Index (DXY), which tracks the greenback against a basket of currencies, extended this week’s slide near the 102.00 mark and continued to lose ground for a third straight day on Friday. The downward trajectory pulls the index below the round figure of 101.00, or above a one-week low in the first half of the European session, as traders now look to crucial US employment details for fresh impetus.

The well-known Nonfarm Payrolls (NFP) report will play a key role in influencing market expectations regarding the Federal Reserve’s (Fed) policy path and determining the next stage of a directional move for the DXY. Meanwhile, bets for a bigger interest rate cut later this month were underpinned by a mixed bag of US employment data released this week that provided evidence of a deteriorating labor market. In fact, a report on Wednesday showed that US job openings fell to a three-and-a-half-year low of 7.673 million in July.

In addition, Automatic Data Processing (ADP) reported on Thursday that private sector employment posted the slowest increase since January 2021 and rose by 99,000 in August. In addition, Chicago Fed President Austan Goolsbee said on Friday that the longer-term trend in labor market data and inflation warrants easing interest rate policy soon and then steadily over the next year. That keeps U.S. Treasury bond yields at their lowest levels in more than a year and continues to undermine demand for the greenback.

With the latest leg down, the DXY has reversed much of last week’s recovery gains from the YTD limit and remains on track for a third week of losses in the past four. Moreover, the aforementioned fundamental context appears strongly tilted in favor of bear traders and suggests that the index’s path of least resistance remains to the downside. That said, an upbeat US jobs report could spark a short-lived rally, although the market’s immediate reaction is more likely to be limited and fade away fairly quickly.

Frequently asked questions about US dollars

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.

VaselineSeptember 6, 2024

0 3 minutes read

Frequently asked questions about US dollars

Vaseline

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