US Dollar struggles to extend rebound as risk mood improves
- US Dollar stays relatively resilient against its major rivals on Monday.
- US Dollar Index struggles to gather recovery momentum following Friday’s sharp decline.
- US labor market showed signs of a cooldown in June.
The US Dollar (USD) holds its ground against its rivals at the beginning of the week but finds it difficult to gather strength after having suffered heavy losses late Friday. The US Dollar Index, which measures the USD’s performance against a basket of six major currencies, lost its traction and erased its daily recovery gains as major equity indexes in the US started to stretch higher after the opening bell.
The USD came under strong selling pressure ahead of the weekend after the monthly jobs report published by the US Bureau of Labor Statistics revealed signs of a cooldown. Nonfarm payrolls (NFP) rose 209,000 in June, less than the market expectation for an increase of 225,000. Additionally, May’s increase of 339,000 got revised lower to 306,000. Other details of the publication revealed that the Unemployment Rate edged lower to 3.6% while annual wage inflation held steady at 4.4%.
The US economic docket will not feature any high-tier data releases on Monday and the USD’s valuation could be influenced by Federal Reserve (Fed) officials’, including San Francisco Fed President Mary Daly and Cleveland Fed President Loretta Mester, comments. Later in the week, June inflation data could trigger the next big action in the USD.
Daily digest market movers: US Dollar edges lower following earlier rebound
- Commenting on the US jobs report, “I expect the US Dollar to remain on the back foot, but to hold some of its ground,” said FXStreet Analyst Yohay Elam. “The mix of weak job growth and wages marching forward shifts the focus to next week’s Consumer Price Index (CPI) report.”
- In an interview with CNBC on Friday, Chicago Federal Reserve Bank President Austan Goolsbee noted that the jobs market was still strong but cooling.
- Over the weekend, US Treasury Secretary Janet Yellen said that she had “direct” and “productive” discussion with senior Chinese officials. However, “the US and China have significant disagreements,” Yellen added.
- The 10-year US Treasury bond yield edges lower but holds above 4%.
- The Dow Jones Industrial Average (DJIA) and the S&P 500 indexes were up 0.6% and 0.3%, respectively, after Wall Street’s opening bell, while the Nasdaq Composite was trading flat.
- Despite the mixed jobs report, markets are still pricing in a more-than-90% chance of the Fed raising the policy rate by 25 basis points in July. The probability of the Fed hiking the interest rate again after July stands at around 30%.
- In a recently published report, “the Dollar provides one of the highest yields of the world’s major currencies, thanks to the Fed’s hiking cycle,” said Morgan Stanley analysts. “In a world of weak global growth, this yield will also likely help the Dollar to appreciate.”
- On a yearly basis, the US CPI is forecast to rise 3.1% in June, following May’s increase of 4%.
Technical Analysis: US Dollar Index fails to find a foothold
The US Dollar Index (DXY) closed below the 100-day Simple Moving Average (SMA) on Friday and the 20-day SMA made a bearish cross with the 50-day SMA. Furthermore, the Relative Strength Index (RSI) dropped below 50 after having moved sideways near that level in the past couple of weeks.
On the downside, 102.00 (psychological level, static level) aligns as key support. A daily close below that level could attract sellers and open the door for an extended slide toward 101.50 (static level) and 101.00 (static level, psychological level).
Strong resistance seems to have formed at 103.00 (100-day SMA, 50-day SMA, Fibonacci 38.2% retracement of the May-June uptrend). If the DXY rises above that level and starts using it as support, it could target 103.50 (Fibonacci 23.6% retracement) and 104.00 (psychological level) next.
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.