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US Dollar breaks down after ECB’s Lagarde issues harsh warnings for market stability

  • The US Dollar remains stuck on the backfoot and is unable to recover against the major peers.
  • ECB’s Lagarde props up concerns by saying the ECB will need to be vigilent and fast to act under any circumstances. 
  • The US Dollar Index lost already over 3% of its value so far this week. 

The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, is breaking the trading regime which it has know for several years. The index trades near 104.00 at the time of writing on Thursday. Several banks and traders are reporting that big clients are repatriating their foreign investments denominated in US Dollars back into their domestic currencies. This might mean such volumes will not come back anytime soon, the FT reports. 

The repatriation comes after weakening US economic data which has worried markets about the possibility of  Trump’s tariffs having an impact on domestic inflation and has brought back firm recession fears this week. Clearly, United States (US) President Donald Trump’s approach is starting to have some negative fallout. 

Meanwhile, the focus will now shift to Europe where a high-stakes European meeting is taking place this Thursday. EU leaders will discuss the spending bill on defense after Trump made clear the US will no longer be playing an active part in NATO. US support to Ukraine has been rolled back by now as well. The European Central Bank (ECB) has lowered its policy rate by 25 basis points as expected, though changed the language of its statement to a bit more hawkish. 

Daily digest market movers: Lagarde issues warning

  • The US Challenger Job Cuts were due for February. A very negative number with a surge by more than 100% to 172,017 head counts compared to 49,795 last month. 
  • The European Central Bank (ECB) has released its monetary policy decision. As expectated, an interest rate cut by 25 basis points (bps) from 2.75% to 2.50% on its benchmark deposit rate.The ECB revised its inflation outlook to 2.3% for 2025 against 2.1% initially. 
  • The US weekly Jobless Claims and US Trade Balance data for January has been released:
    • Initial claims for the week ending on February 28 came in at 221,000, stronger than the expected 235,000 and lower than last week’s print of 242,000. Continuing Claims for the week ending on February 21 came in higher at 1,897 million, a miss on the 1.880 million expected and from the previous 1.862 million. 
    • The US Goods Trade Balance for January saw a wider deficit by $156.8 billion, a big miss on the $127.4 billion deficit expected, coming from a $153.3 billion deficit in December.
  • ECB Chairman Christine Lagarde is still speaking at the time or writing. ECB’s Lagarde issues quite a few warning on the current change in trading regime and that the ECB will need to be vigilant in these very uncertain and unclear times. The ECB Chariman reiterates that the ECB now, even more than during the Covid and post-Covid era, will be data dependent than ever. 
  • Equities are falling further after ECB’s Lagarde’s statements are not revealing a positive outlook for the markets on what’s to come. 
  • The CME Fedwatch Tool projects a 79,6% chance of an interest rate cut in the June meeting, with only a 20.4% chance to keep interest rates at the current range of 4.25%-4.50% in June. 
  • The US 10-year yield trades around 4.28%, off its near five-month low of 4.10% printed on Tuesday.

US Dollar Index Technical Analysis: Just the start

The US Dollar Index (DXY) is bleeding this week, and the reason for the outflows is worrisome. Several trading desks report that many European pension funds, hedge funds, and other big institutions are repatriating their US Dollar-denominated assets back to their domestic currencies. That means a substantial volume parked for years under the US Dollar has now been moved and does not seem to be coming back anytime soon as long these recession fears will still take place. 

On the upside,  the first upside target is to recover the 200-day Simple Moving Average (SMA) at 105.04. Once that level has been recovered, several near-term resistances are lined up, with 105.53 and 105.89 identified as two heavy pivotal levels before breaking back above 106.00.

On the downside, 104.00 has seen selling pressure but tries to hold for now. Further down, 103.00 could be considered as a bearish target in case US yields roll off again, with even 101.90 not unthinkable if markets further capitulate on their long-term US Dollar holdings. 

US Dollar Index: Daily Chart

Employment FAQs

Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.

The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.

The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.