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US Dollar consolidates gains after Fed speakers ask for further disinflation

  • US Dollar pauses as investors dissect recent comments from Federal Reserve officials.
  • Markets appear skeptical about the Fed’s guidance and continue to anticipate potential cuts in September.
  • Fed officials’ cautious remarks limit downside in the US Dollar.

On Wednesday, the US Dollar as measured by the DXY Index (DXY) remained relatively unchanged around the 105.20 mark as investors parsed words from key Federal Reserve (Fed) officials on a quiet Wednesday. Following last week’s 0.50% gain, the index is tallying a three-day losing streak.

The US economic outlook is starting to show some signs of weakness. If data continues to fuel hopes of a September interest rate cut, the USD may struggle.

Daily digest market movers: US Dollar flat as markets wrestle with Fed remarks

  • Cleveland Federal Reserve President Loretta Mester voiced a preference for a “longer run of good-looking inflation data” before making a firm decision.
  • Minneapolis Fed President Neel Kashkari expressed that waiting until December to cut interest rates could be a “reasonable prediction.”
  • Philadelphia Federal Reserve President Patrick Harker proposed the likelihood of the Fed keeping rates steady for longer than the market currently anticipates.
  • On a more dovish note, Fed Governor Adriana Kugler suggested that if economic conditions continue to show improvements, the Fed could consider additional rate reductions.
  • Her colleague, Richmond Federal Reserve President Thomas Barkin, similarly indicated his readiness to back a rate cut but would need more data before doing so.
  • According to the CME Group’s FedWatch Tool, the probability of lower interest rates by the upcoming meeting on September 18 now stands at about 67%, which clashes with Fed guidance that hinted at only one cut in 2024.

DXY technical analysis: Momentum falters, but bullish sentiment persists

Technical indicators displayed flat momentum for Wednesday’s session, yet the broader outlook remains optimistic. The Relative Strength Index (RSI) maintains above 50, with the Moving Average Convergence Divergence (MACD) still showcasing green bars that point toward bullish sentiment.

Additionally, the DXY continues to hold above its 20, 100 and 200-day Simple Moving Averages (SMA), which, coupled with investors’ apparent pause, presents a persistent bullish outlook for the US Dollar. However, these indicators suggest that the previous week’s momentum may be starting to wane, contributing to a consolidation phase in the DXY.

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.