US Dollar rebounds as major central banks reduce Dollar operations with Fed
- US Dollar pauses decline but any recovery attempts appear short-lived.
- Top-tier economic data and tech earnings from the United States this week to affect USD valuation.
- The daily technical setup for the US Dollar Index continues to favor bears in the near term.
The United States Dollar (USD) is correcting from weekly lows, as bulls find their footing amid broad risk-aversion. Rising tensions over the approaching US debt ceiling deadline and a lack of clarity on the Federal Reserve (Fed) interest rates outlook weigh on the market sentiment. Investors readjust their US Dollar positions, bracing for a week of high-profile quarterly earnings and closely watched economic data from the United States.
Meanwhile, The European Central Bank (ECB), the Bank of Japan (BoJ), the Bank of England (BoE) and the Swiss National Bank (SNB) announced in a joint statement that they will reduce the frequency of their dollar operations with the Fed from May 1 as the volatility in financial markets has receded. This announcement seems to be providing an additional support to the USD.
Earnings this week include a spate of potential market movers, including tech and tech-adjacent Alphabet Inc, Microsoft Corp, Meta Platforms Inc and Amazon.com. On the macroeconomic front, the first quarter Gross Domestic Product (GDP) and April Personal Consumption Expenditures (PCE) Price Index will be closely scrutinized in the second half of this week. In the meantime, the mid-tier US Conference Board Consumer Confidence data and housing data will entertain US Dollar traders.
The US Dollar Index, which tracks the USD performance against a basket of six major currencies, trades marginally higher on the day, near 101.50.
Daily digest market movers: US Dollar finds a foothold
- On Monday, the Federal Reserve Bank of Chicago announced that the National Activity Index remained unchanged at -0.19 in March. Meanwhile, the Federal Reserve Bank of Dallas’ Texas Manufacturing Survey showed that the headline Business Index plunged to -223.4 in April from -15.7 in March.
- Wall Street’s main indices closed mixed on Monday, as Nasdaq underperformed on worries about tech earnings ahead.
- Troubled US bank, First Republic Bank, shares sank over 20% after market hours, as it said deposits plunged by more than $100 billion in the first quarter.
- Concerns persist over the approaching US debt ceiling deadline. The House of Representatives is expected to vote on a Republican-led debt and spending bill this week.
- 10-year US Treasury bond yields keep falling toward the 3.40% after breaching the 3.50% key level on Monday.
- Markets are currently pricing a roughly 90% probability of a 25 basis points Federal Reserve (Fed) rate hike at the upcoming meeting, according to the CME Group FedWatch Tool.
- The Fed is in the blackout period ahead of its May 3 monetary policy announcements.
- This Tuesday, the Conference Board’s Consumer Confidence data for April from the United States will be reported alongside the New Home Sales data.
- Earnings from US tech giants Microsoft Corp, which backs ChatGPT, and Google parent Alphabet Inc, top the watchlist on Tuesday.
- The US Bureau of Economic Analysis will unveil the first estimate of first-quarter GDP growth on Thursday. The US economy is forecast to expand at an annualized rate of 2% in Q1, down from the 2.6% recorded in the last quarter of 2022.
Technical analysis: US Dollar Index remains technically bearish
The US Dollar Index (DXY) is challenging the 101.50 psychological level on the road to recovery from weekly troughs. The recovery could gain traction if DXY manages to yield a daily closing above the bearish 21-Day Moving Average (DMA). It is worth noting that the index has failed to settle above the 21 DMA since March 15 on a daily candlestick closing basis.
Acceptance above the latter could initiate a fresh upswing toward the 102.50 psychological barrier, beyond which the confluence of the downward-sloping 50 and 100 DMAs at around 103.30 will be on buyers’ radars.
With the 14-day Relative Strength Index (RSI), however, still below the 50.00 level, the recovery attempts in DXY are likely to be sold into. Immediate support is seen at the intraday low of 101.19, below which the 101.00 round number will challenge the bullish commitments. Deeper declines will seek validation from the multi-month low reached on April 14 at 100.78.
US Dollar FAQs
What is the US Dollar?
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
How do the decisions of the Federal Reserve impact the US Dollar?
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
What is Quantitative Easing and how does it influence the US Dollar?
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
What is Quantitative Tightening and how does it influence the US Dollar?
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.