US Dollar recovery gathers steam as focus shifts US inflation report
- US Dollar manages to stay resilient against its major rivals on Tuesday.
- US Dollar Index clings to modest daily gains following Monday’s rebound.
- April inflation data from the US could trigger the next big reaction in USD.
The US Dollar (USD) shook off the selling pressure at the beginning of the week with the US Dollar Index (DXY) closing in positive territory on Monday. Early Tuesday, the USD holds its ground as market participants refrain from taking large positions ahead of the highly-anticipated April inflation data from the United States (US), which will be released on Wednesday.
Later in the session, NY Federal Reserve President John Williams will be delivering a speech. The USD’s valuation, however, is likely to continue to be driven by risk perception, at least in the near term.
Daily digest market movers: US Dollar capitalizes on safe-haven flows
- The NFIB Business Optimism Index declined to 89 in April from 90.1 in March. This reading came in slightly below the market expectation of 89.6.
- The IBD/TIPP Economic Optimism Index edged lower to 41.6 in May from 47.4 in April, compared to analysts’ estimate of 48.2.
- “The inflation rate has started to come down. The economy has started to slow in an orderly fashion… The economy will have the opportunity to continue to expand,” Fed Governor Philip Jefferson said on Tuesday.
- The Fed noted in its Loan Officer Survey for the first quarter that respondents reported tighter standards and weaker demand for commercial and industrial (C&I) loans to large and middle-market firms. “Banks reported tighter standards and weaker demand for all commercial real estate loan categories,” the publication further read.
- In an interview with Yahoo Finance on Monday, Chicago Fed President Austan Goolsbee repeated that it was too early to say what the next policy move will be, explaining that there were a lot of uncertainties regarding the impact of credit tightening on the economy.
- The benchmark 10-year US Treasury bond yield extended its rebound into a third straight day on Monday and gained nearly 2%. The 10-year yield corrects lower early Tuesday and stays slightly below 3.5%.
- Wall Street’s main 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 Index opened lower on Tuesday, the DJIA started the day near Monday’s closing level.
- According to the CME Group FedWatch Tool, markets are pricing in an 88% probability that the Fed will leave the policy rate unchanged in June.
- The US Bureau of Labor Statistics (BLS) reported on Friday that Nonfarm Payrolls rose 253,000 in April, surpassing the market expectation of 179,000 by a wide margin. On a negative note, March’s 236,000 increase got revised lower to 165,000.
Technical analysis: US Dollar Index advances beyond key hurdle
The US Dollar Index (DXY) has advanced beyond 101.60, where the 20-day Simple Moving Average (SMA) is located. A daily close above that level could attract buyers and open the door for an extended recovery toward 102.00 (psychological 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 ahead of 100.00 (psychological level, static level) and 99.50 (static level from March 2022).
It’s also worth mentioning that the Relative Strength Index (RSI) indicator on the daily chart is still below 50, suggesting that the bullish momentum is not yet strong enough for a steady rebound.
US Dollar FAQs
What is the US Dollar?
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.
How do the decisions of the Federal Reserve impact the US Dollar?
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.
What is Quantitative Easing and how does it influence 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 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.
What is Quantitative Tightening and how does it influence the 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.