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US Dollar clears gains, cooling dovish bets on the Fed limits the downside

  • The US Dollar Index trades with mild gains around 106.20.
  • DXY is favored by a combination of factors, including Putin’s threat on nuclear weapons usage.
  • Fed officials have cooled on aggressive easing with Powell downplaying the need to be hasty.

The US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, trades with mild gains around 106.20 on Tuesday, lifted by a combination of factors. The USD initially surged following Russian President Vladimir Putin’s announcement that nuclear weapons could be used in conflicts with non-nuclear states supported by nuclear powers. 

However, the Greenback has eased somewhat as the release of Chinese economic data and details of the government’s stimulus package have also contributed to the USD’s mild retracement.

The US Dollar remains in an uptrend, supported by strong US economic data and market uncertainty regarding Federal Reserve (Fed) interest rate cuts. Despite a recent pullback due to profit-taking, DXY has sustained its momentum and reached yearly highs near 107.00. 

Daily digest market movers: US Dollar mixed, cooling dovish bets on the Fed favors the upside

  • The US Dollar has eased from its recent highs as investors take profits after its recent rally against major currencies.
  • Chinese economic data and details of the government’s stimulus package contributed to the USD’s mild pullback.
  • Fed Chair Jerome Powell emphasized a cautious approach to rate cuts, highlighting the economy’s strength.
  • Other Fed officials, including Kugler, echoed Powell’s message, stressing the need to monitor both inflation and unemployment.
  • Market expectations for a December rate cut have declined in response to Powell’s comments. 
  • On the data front, Housing Starts in the US dropped by 3.1% in October, reaching 1.311 million units, according to Tuesday’s monthly report from the US Census Bureau. 
  • Building Permits fell by 0.6% in October after a revised 3.1% decrease in September, which was initially reported as a 2.9% decline.

DXY technical outlook: Consolidation follows rise to annual high, overbought levels raise reversal concerns

The DXY has been in an uptrend of late, influenced by strong economic data and the Fed’s cautious statements. Despite reaching a 52-week high, profit-taking has caused a slight pullback, suggesting the possibility of consolidation. 

Technical indicators, including the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), remain positive but are flat, indicating consolidation. Additionally, the index is overbought, raising concerns about a potential reversal.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.