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US Dollar trims losses on Friday but closes its weakest week since November


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  • DXY Index shows resilience despite the worst weekly performance over a month, hovering at 102.40.
  • The US Dollar was lifted by strong S&P Global Services PMI figures from December.
  • Dovish bets on the Fed may limit the upward movement.

   
The US Dollar (USD), measured by the DXY index, is trading at 102.40, posting daily gains but marking its worst weekly performance in over a month. This movement comes on the back of strong US Services PMI data and investors’ efforts to consolidate the losses of the last three sessions. 

The US Federal Reserve held a dovish stance in Wednesday’s meeting, embracing lowered inflation at the end of 2023 with no planned rate hikes in 2024 and forecasting 75 bps of easing for next year. In light of this indication, market anticipations align somewhat with the Fed’s view, catalyzing risk-on flows and dampening demand for the haven Greenback. 

Daily Market Movers: US Dollar gains momentum amid strong US Services PMI data

  • The Dollar Index (DXY) records gains, wrapping up at around 102.4. This comes after a rough week for the DXY, marking its worst weekly performance in over a month.  
  • December saw an overall gain in the S&P Global Services PMI with 51.3, beating the consensus of 50.6 and the previous month’s 50.8.
  • The Manufacturing PMI for December underperformed, recording 48.2 compared to the expected 49.3 and the previous 49.4. Moreover, despite expectations, December’s S&P Global Composite PMI exceeded the previous 50.7, scoring 51.
  • The US bond yields are currently mixed, with a 2-year yield at 4.37%, slightly up, the 5-year yield at 3.90% and the 10-year yield at 3.92%, posting minor declines.
  • The CME FedWatch Tool indicates that markets are currently predicting the first rate cut by March 2024, further weighing on the Greenback.

Technical Analysis: DXY bears take a step back 

The indicators on the DXY daily chart reflect that bearish momentum largely dominates the market despite the bears taking a breather. The Relative Strength Index (RSI) shows a downward slope in negative territory, highlighting the presence of dominant selling momentum and underscoring lackluster buying enthusiasm among traders. Furthermore, the Moving Average Convergence Divergence (MACD) shows flat red bars, indicating that the bearish momentum is present but currently on a break.

Further confirmation of the prevalent bearish bias is provided by the positioning of the Simple Moving Averages (SMAs). The index trading below its 20, 100, and 200-day SMAs inherently points towards a firm grip of sellers in the broader technical landscape.

Given the current 1.50% weekly decline in the DXY value, the current consolidation phase could be a pause of the bearish trend rather than a reversal. The short-term technical outlook remains biased to the downside.

Support levels: 101.50, 101.30, 101.00.
Resistance levels: 103.45  (20 and 200-day SMA bearish crossover), 104.50 (100-day SMA), 104.70.

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.