Forex Trading, News, Systems and More

US Dollar continues to outperform its rivals ahead of the weekend


Share:

  • US Dollar continues to gather strength in the European session on Friday.
  • US Dollar Index climbed to a fresh 9-day high above 101.00.
  • US economic docket will not feature any high-tier data releases ahead of the weekend.

Following a quiet Asian session on Friday, the US Dollar found demand in the European session. The US Dollar Index (DXY), which tracks the USD’s valuation against a basket of six major currencies, extended its weekly uptrend and rose above 101.00 for the first time in over a week.

The USD captured capital outflows out of the Japanese Yen early Friday, helping the DXY gaining traction. Citing five sources familiar with the matter, Reuters reported on Friday that the Bank of Japan was leaning toward maintaining its yield curve control (YCC) strategy at next week’s policy meeting. Dovish BoJ expectations triggered a JPY selloff and provided a boost to the USD.

The US economic docket will not offer any high-impact data releases that could potentially impact the USD’s performance against its rivals ahead of the weekend. Investors could also refrain from taking large positions ahead of next week’s highly anticipated Federal Reserve policy meeting. 

Daily digest market movers: US Dollar looks to post strong weekly gains

  • The number of first time application for unemployment benefits in the US declined to 228,000 in the week ending July 15, the US Department of Labor announce on Thursday. This reading came in much below the market expectation of 242,000 and lifted the US Dollar Index. Other data showed that Existing Home Sales declined 3.3% in June following the 0.2% growth in May.
  • US stock index futures trade modestly higher on the day. The Nasdaq Composite lost more than 2% on Thursday, while Dow Jones Industrial Average closed in positive territory.
  • The Wall Street Journal reported early Thursday that the United States banned 14 Iraqi banks from using the USD in transactions on suspicion of these banks funnelling USDs to Iran.
  • China’s ambassador to Washington, Xie Feng, said late Wednesday that China will respond if the US were to impose more curbs on the country’s chip sector.
  • The Federal Reserve Bank of Philadelphia’s Manufacturing Index inched slightly higher to -13.5 in July from -13.7 in June.
  • The Federal Reserve Bank of Atlanta’s GDPNow model forecasts a 2.4% US GDP growth in the second quarter.
  • The monthly data published by the US Census Bureau showed Wednesday that Housing Starts declined 8% on a monthly basis in June, following the 15.7% increase (revised from +21.7%) recorded in May. In the same period, Building Permits fell 3.7%, swinging from May’s 5.6% increase.
  • Retail Sales in the US rose 0.2% in June to $689.5 billion, the US Census Bureau reported on Tuesday. The 0.3% increase recorded in May had been forecast to reach 0.5% in June, but the data came in far below. Retail Sales Ex-Autos increased 0.2% in the same period, coming in also slightly below the market expectation of 0.3%. 
  • Industrial Production in the US contracted 0.5% for the second straight month in June, data from the US Federal Reserve’s showed Tuesday.
  • US Treasury Secretary Janet Yellen told Bloomberg on Monday that there is a good chance that the Biden administration will go ahead with outbound investment controls on China.
  • The US Dollar weakened significantly last week as soft inflation data revived expectations about the Federal Reserve reaching the terminal rate with a 25-basis-point (bps) rate hike in July.
  • The Consumer Price Index (CPI) in the US rose 3% on a yearly basis in June, following the 4% increase recorded in May. The annual Producer Price Index (PPI) edged 0.1% higher in the same period.
  • Commenting on the USD’s outlook: “In case of an increasingly rapid fall in inflation and weakening economic data, the market might increasingly rely on key rates not remaining at high levels for a long time, whereas rate cuts before the end of the year are becoming increasingly likely,” said Antje Praefcke, FX Analyst at Commerzbank. “That would cause the USD to ease further.”

Technical analysis: US Dollar Index gathers recovery momentum

The Relative Strength Index (RSI) indicator on the daily chart rose above 40 early Friday, suggesting that the US Dollar Index (DXY) has more room on the upside before turning neutral. 

101.00 (former support, static level) aligns as a key pivot point for DXY. A weekly close above that level could open the door for an extended rebound toward 101.50 (static level), 101.80 (20-day Simple Moving Average) and 102.00 (psychological level).

On the downside, 100.50 (static level) forms interim support before 100.00 (psychological level). If the DXY index makes a daily close below the latter, 99.20 (static level from March 2022) could be seen as next support.

US Dollar FAQs

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.

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.

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.

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.