US Dollar struggles to find demand as US data feed into dovish Fed narrative
- US Dollar has been struggling to preserve its bullish momentum on Thursday.
- US Dollar Index fell below 104.00 from multi-month high it set above 104.50.
- Markets lean toward a pause in Fed rate increases in June.
The US Dollar (USD) has lost its traction after having outperformed its major rivals on Wednesday. The US Dollar Index, which tracks the USD’s valuation against a basket of six major currencies, extended its daily slide following the macroeconomic data releases from the US and touched its weakest level in a week below 104.00.
Investors will be paying close attention to comments from Federal Reserve (Fed) officials ahead of Friday’s May jobs report and the beginning of the Fed blackout period on Saturday.
Daily digest market movers: US Dollar continues to weaken
- The economic activity in the US manufacturing sector continued to contract at an accelerating pace in May with the ISM Manufacturing PMI dropping to 46.9 from 47.1 in April. This reading came in worse than the market expectation of 47. More importantly, the inflation component of the PMI survey, Prices Paid Index, fell sharply to 44.2 from 53.2, compared to analysts’ estimate of 52.
- The data published by Automatic Data Processing (ADP) showed on Thursday that private sector employment in the US rose by 278,000 in May. This reading surpassed the market expectation of 170,000 by a wide margin. Underlying details of the publication revealed that the annual wage inflation for ‘job stayers’ declined to 6.5% from 6.7% in April.
- The US Bureau of Labor Statistics revised the change in Unit Labor Costs for the first quarter lower to 4.2% from 6.3% in the advanced estimate.
- Other data from the US revealed that there were 232,000 initial claims for unemployment benefits in the week ending May 27, compared to 230,000 in the previous week.
- Philadelphia Fed President Patrick Harker noted on Wednesday that he was leaning toward a pause in rate hikes in June but noted that incoming data may change his mind.
- Federal Reserve Governor Philip Jefferson said that pausing rate hikes at the next FOMC meeting would offer time to analyse more data before making a decision about the extent of additional tightening.
- According to the CME Group FedWatch Tool, the probability of one more 25 basis points (bps) Fed rate hike at the upcoming meeting declined below 30% from nearly 70% early Wednesday.
- The House of Representatives passed a bill to suspend the debt limit through January 1, 2025. US stock index futures trade modestly higher on Thursday.
- The US Bureau of Labor Statistics reported on Wednesday that the number of job openings on the last business day of April stood at 10.1 million, compared to 9.74 million in March. This reading came in higher than the market expectation of 9.37 million and provided a short-lasting boost to the USD.
- In an interview with the Financial Times, Cleveland Federal Reserve (Fed) Bank President Loretta Mester said that she doesn’t necessarily see a compelling reason for pausing rate increases amid a “really embedded, stubborn inflationary pressure.”
- Consumer sentiment in the US weakened slightly in May with the Conference Board’s (CB) Consumer Confidence Index edging lower to 102.3 from 103.7 in April (revised from 101.3). The Present Situation Index declined to 148.6 from 151.8 and the Consumer Expectations Index stayed virtually unchanged at 71.5. Finally, the one-year consumer inflation expectations ticked down to 6.1% in May from 6.2% in April.
- House prices in the US rose by 0.6% on a monthly basis in March, the monthly data published by the US Federal Housing Finance Agency showed on Tuesday. This reading followed February’s increase of 0.7% (revised from 0.5%) and came in better than the market expectation of +0.2%.
Technical analysis: US Dollar Index falls below key support
The recent action of the US Dollar Index (DXY) confirmed 104.50 as a strong technical resistance in the near term. 104.00 (Fibonacci 23.6% retracement of the November-February downtrend) aligns as a key pivot point for DXY and a daily close below that level could open the door for an extended slide toward 103.00, where the 100-day Simple Moving Average (SMA) and the 20-day SMA meet.
On the flip side, buyers could show interest in case DXY reclaims 104.00. In that scenario, 104.50 (static level) aligns as first hurdle before the index could target 105.00 (psychological level, static level) and 105.60 (200-day SMA, Fibonacci 38.2% retracement).
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.