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US Dollar gives up gains of robust GDP and labor market figures

  • The Q4 US GDP was revised higher to 3.4%, while Initial Jobless Claims came strong.
  • The March Chicago PMI came in lower than expected.
  • US Treasury yields stand mixed and limit the upside for the USD.

The US Dollar Index (DXY) initially soared to 104.70 but then stabilized at 104.50. On the positive side, Gross Domestic Product (GDP) revision and strong weekly Initial Jobless Claims figures from the US benefited the Greenback. But the weaker-than-expected Chicago PMI seems to have brought down the USD’s momentum.

The US economy appears steady with the Federal Reserve’s (Fed) stance treading a cautious path. Despite upward revisions in inflation projections, the Fed, under Powell’s guidance, refrains from overreacting to short-term spikes in inflation. The speculated start of an easing cycle in June remains dependent on incoming data. 

Daily digest market movers: DXY fails to hold its rally to highs since February, eyes on PCE

  • Unemployment data came in slightly below consensus at 210K against the anticipated 215K for the week ending on March 23.
  •  Q4 Gross Domestic Product (GDP) was revised higher to a yearly growth of 3.4%.
  • On the negative side, the March Chicago Purchasing Managers Index (PMI) data released by the Institute for Supply Management was below expectations at 41.4, against the forecasted 46 and previous 44.
  • US Treasury bond yields show mixed results with the 2-year yield at 4.60%, 5-year yield at 4.20%, and 10-year yield at 4.19%.
  • The probability of a rate cut in June has dropped to 66% compared to 85% at the beginning of the week, which seems to be cushioning the Greenback.
  • The week’s highlight will be the headline Personal Consumption Expenditures (PCE) due on Friday, which is expected to have risen by 2.5% YoY, while the core measure is seen coming in at 2.8%. 
  • The outcome of the Fed’s preferred gauge of inflation will dictate the pace of the USD for the short term.

DXY technical analysis: DXY bulls are in command, but struggle to make a significant upward move

The Relative Strength Index (RSI) is mildly up around 60, while the Moving Average Convergence Divergence (MACD) manifests green bars that suggest a presence of bullish momentum. Yet it remains to be seen if the current buying traction can spur the DXY to higher levels as the MACD is also hinting at limited upward potential.

Looking broadly, the DXY sits comfortably above the 20, 100 and 200-day Simple Moving Averages (SMAs), indicating that the buying momentum is stronger in a larger context. This suggests that despite short-term bearish undertones, the bulls have a firmer grip in the long run.

Despite their dominance, the bulls are currently steady but seem to be struggling to gain more ground, which can impact the short-term dynamic of the DXY. 

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.