- DXY index declined to 106.20, down by 0.40%.
- US government bond yields are declining, while Wall St indexes are rising.
- Focus is set on Friday’s Nonfarm Payrolls report for October.
The US Dollar (USD) tumbled on Thursday, and the DXY index declined to 106.20, driven by dovish bets on the Federal Reserve (Fed) and falling US bond yields following Wednesday’s decision and Chair Powell’s tone. All eyes are now on the Nonfarm Payrolls (NFP) report from October on Friday, which could set the tone of the USD in the short term and extend its losses.
The Federal Reserve (Fed) and Chair Jerome Powell welcomed the latest data, which showed that the United States economy remains strong, and noted that the job creation pace and inflation are decelerating. In addition, Powell hinted that the bank has tightened significantly and that in the next decisions, he will consider the tighter financial conditions and the cumulative effects of monetary policy.
Daily Digest Market Movers: US Dollar declines on dovish bets on the Fed, labor market weakness
- The DXY index plunged below the 20-day SMA, toward 106.20, down by 0.40%.
- Ahead of October NFPs on Friday, the US reported soft labour market data.
- The Unit Labour Costs from Q3 declined by 0.8% QoQ, while markets expected a 0.7% expansion.
- In addition, the US Department of Labor revealed that the Initial Jobless Claims from the week ending October 28 came in higher than expected. Folks filing for unemployment benefits came in at 217,000, higher than the consensus of 210,000 and an increase in relation to its last reading of 212,000.
- Elsewhere, US Treasury yields are sharply falling. The 2-year rate fell to 4.98%, while the longer-term 5 and 10-year rates retreated toward 4.63% and 4.67%, hindering the US Dollar from finding demand.
- According to the CME FedWatch Tool, the odds of a 25-basis-point hike in December are still low, around 20%, adding further pressure to the USD.
Technical Analysis: US Dollar Index bulls give up, losing the 20-day SMA
The technical analysis of the daily chart suggests a neutral to bearish stance for the DXY Index as the bears work on staging a recovery and exerting their presence. The Relative Strength Index (RSI) points southward below its midline, while the Moving Average Convergence (MACD) histogram displays increasing red bars. Furthermore, the index is below the 20-day Simple Moving Average (SMA), which could pave the way for additional downward movements in the short term.
That being said, the DXY holds above the 100 and 200-day SMAs, pointing toward the prevailing strength of the bulls in the larger context.
Supports: 106.00, 105.70, 105.50
Resistances: 106.30 (20-day SMA), 106.50,106.90.
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.