US Dollar Index comes to a halt with US President Carter’s funeral
- The US Dollar in tight range at current levels as inflation worries fade a touch.
- Inflation concerns are top priority, triggering a mini-crisis in UK Gilts.
- The US Dollar Index (DXY) hovers arond 109.00 in search of support.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades flat above 109.00 on Thursday while bond markets are easing down after an already volatile week. Yields surged across the globe after traders started to worry about all the plans President-elect Donald Trump wants to implement, e most of them perceived as highly inflationary. This has triggered widening rate differentials between the US and other countries
The mentioned surges in yields triggered a brief mini-crisis in UK Gilts. This week, long-term UK borrowing costs have soared substantially and the British Pound (GBP) has fallen. Markets perceive this as a sign that investors have lost faith in the government’s ability to manage the national debt and control inflation, while the British government is soothing by communicating it will stick to its fiscal rules even if borrowing costs will hit their higest level since the financial crisis, the FT reports.
The US economic calendar is light, with a shortened trading day due to the National Day of Mourning for former President Jimmy Carter. The US Challenger Job Cuts number for December will get most of the attention, while four Fed members are set to speak.
Daily digest market movers: Settling down
- US stock markets will remain closed or will be trading in shortened hours this Thursday in honor of former President Jimmy Carter.
- December Challenger Job Cuts came in at 38,792, softer than the previous 57,727.
- The Fed Minutes released on Wednesday showed Fed officials confirming a gradual and possibly longer steady rate before considering to cut further, Bloomberg reported.
- At 14:00 GMT, Federal Reserve Bank of Philadelphia President Patrick Harker speaks in Princeton right before the National Association of Corporate Directors New Jersey Chapter Economic Forecast 2025.
- Around 17:40 GMT, the Federal Reserve Bank of Richmond Thomas Barkin speaks to the Virginia Bankers Association and the Virginia Chamber of Commerce.
- At 18:30 GMT, the Federal Reserve Bank of Kansas City President Jeffrey Schmid delivers a speech on the economic and monetary policy outlook at the Economic Club of Kansas City.
- Around 18:35GMT, the Federal Reserve Governor Michelle Bowman will give a speech at the California Bankers Association 2025 Bank Presidents Seminar about 2024 reflections, including monetary policy, economic performance and lessons for banking regulation.
- Equities are having a change of heart again, with European equities and US futures turning green ahead of the US Opening Bell.
- The CME FedWatch Tool is projecting a 93.1% chance that interest rates will be kept unchanged at current levels in the January meeting. Further on, expectations are for the Fed to remain data-dependent with uncertainties that could influence the inflation path once President-elect Donald Trump takes office on January 20.
- US yields are softening a touch with the US 10-year benchmark at 4.65%, off the fresh nine -month high at 4.728% seen on Wednesday.
US Dollar Index Technical Analysis: Steady level for now at 109.00
The US Dollar Index (DXY) seems to be stalling its rally just above 109.30 on Thursday. Although 110.00 is very near, the DXY might need to dip again back to 108.00 or lower in order to take out that 110.00 level in the next rally, as the market seems to have fully priced in all inflation elements for now.
On the upside, it is key that the green ascending trend line can hold as support, although that is often not the scenario going forward. If the DXY can head and break above the 110.00 psychological barrier, 110.79 becomes the next big level. Once beyond there, it is quite a stretch to 113.91, the double top from November 2023.
On the contrary, the first downside barrier is 107.35, which has now turned into support. The next level that might halt any selling pressure is 106.52, with the 55-day Simple Moving Average (SMA) at 106.63 reinforcing this region of support.
US Dollar Index: Daily Chart
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.