US Dollar gains on trade war fears
- The US Dollar Index soars above 106.50 on Monday.
- DXY surges higher driven by Trump’s warnings on tariffs against BRICS nations
- Strong November ISM manufacturing PMI helps the USD.
The US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, has surged above the 106.50 level on Monday, the first trading session in December. This move higher has been driven by several factors, including news that US President-elect Donald Trump favors imposing tariffs on goods from Brazil, Russia, India, China and South Africa and other nations interested in joining a future BRICS currency. Strong PMI data from November from the ISM has also helped the DXY get a boost.
Daily digest market movers: US Dollar gains nearly 1% at the start of the week
- News of Donald Trump planning to impose tariffs on countries who intend to join the BRICS currency has strengthened the US Dollar.
- On the data front, the ISM Manufacturing Purchasing Managers Index (PMI) increased to 48.4 in November, signifying a milder rate of contraction in the US manufacturing sector compared to October’s value of 46.5.
- The Employment Index within the PMI survey rose to 48.1 in November from 44.4 in October, indicating an improvement in job creation within the manufacturing sector.
DXY technical outlook: Upward trajectory likely to continue with resistance at 108.00
Technical indicators, including the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), are signalling that the recent period of consolidation for the Greenback may be coming to an end.
In that sense, the 108.00 level could be re-tested. In addition, the recovery of the 20-day Simple Moving Average (SMA) has improved the short- term outlook.
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.