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US Dollar pops with Fed comments on changes for US bank capital rules

  • The US Dollar pops higher in US trading after suprise comments from Fed’s Barr. 
  • All eyes are on the first debate between Trump and Harris on Tuesday night in Philadelphia. 
  • The US Dollar Index picks up its rally and heads higher. 

The US Dollar (USD) is jumping higher this Tuesday after surprise comments from Federal Reserve Vice Chair for Supervision Michael Barr. US regulators are set to make changes to their bank-capital rules proposal. Main element is cutting the expected impact to the biggest banks by half and exempting smaller lenders from large portions of the measure.

On the economic data front, the economic calendar nothing really market moving left besides the debate between former US President Donald Trump and Vice-President Kamala Harris. For later this week the US Consumper Price Index (CPI) is due. The number will be the last piece of evidence for the Fed in its consideration to either cut by 25 or 50 bais points next week. 

Daily digest market movers: Small sprint

  • The NFIB Business Optimism Index for August came in at 91.2,  below the 93.6 expected and down from 93.7 previously.
  • The Organization of the Petroleum Exporting Countries (OPEC) has released its monthly outlook report and sees still ample amount of demand, despite the recent easing in global economic activity. Enough though for OPEC to soon restart its production to more normal capacity and lift its production cuts which will be kept in place for another two months, Bloomberg reports. 
  • Federal Reserve Vice Chair for Supervision Michael Barr moved the US Dollar with his comments on the regulations for bank capital rules in the blackout period ahead of the Fed’s meeting on September 17-18.
  • The US Treasury is set to distribute a 3-year note around 17:00 GMT. 
  • US equities dive lower on the back of that US capital requirements rule for banks, with all indices giving up earlier gains. 
  • The CME Fedwatch Tool shows a 73.0% chance of a 25 basis points (bps) interest rate cut by the Fed on September 18 against a 27.0% chance for a 50 bps cut.  For the meeting on November 7, another 25 bps cut (if September is a 25 bps cut) is expected in November by 31.9%, while there is a 52.9% chance that rates will be 75 bps (25 bps + 50 bps) and a 15.2% probability of rates being 100 (25 bps + 75 bps) basis points lower. 
  • The US 10-year benchmark rate trades at 3.68%, printing a fresh low for the week.

US Dollar Index Technical Analysis: A bit caught off guard

The US Dollar Index (DXY) is letting loose this Tuesday after its rally on Monday, when the DXY was able to cross to the higher level of the range it has been trading since mid-August. The light data calendar makes the US Dollar range trade for now, awaiting either more clear data to confirm what kind of interest-rate cut markets will get next week from the Fed or any geopolitical catalysts

The first resistance at 101.90 is getting ready for a second test after its rejection last week. Further up, a steep 2% uprising would be needed to get the index to 103.18.  The next tranche up is a very misty one, with the 55-day Simple Moving Average (SMA) at 103.40, followed by the 200-day SMA at 103.89, just ahead of the big 104.00 round level. 

On the downside, 100.62 (the low from December 28) holds strong and has already made the DXY rebound four times in recent weeks.  Should it break, the low from July 14, 2023, at 99.58, will be the ultimate level to look out for. Once that level gives way, early levels from 2023 are coming in near 97.73.

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.