- The Greenback back in a weekly loss ahead of the US trading session on Friday.
- Headline risk persists with headlines on the government shutdown and tariff headwinds.
- The US Dollar Index has been limited by the 104.00 hurdle and looks to be closing off the week in a negative tone.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, dips lower again on Friday after a few headlines on tariffs and the US spending bill. The index, which has been limited below the 104.00 hurdle this week, hasn’t moved that much despite rumors of a possible ceasefire deal by Ukraine, the first steps in the German spending plan voting and retaliations from Canada and Europe on US tariffs.
On the economic data front, the final releases are expected later this Friday. The University of Michigan will publish its preliminary consumer sentiment reading for March and the 5-year inflation expectation.
Daily digest market movers: Headwinds from the WTO
- Gold as a safe haven asset has breached the $3,000 mark this Friday in a recession-feared-induced rally where traders are much concerned about economic growth and the tariffs outlook, with reciprocal levies coming into effect in April.
- A government shutdown looks to be avoided after Senate Minority Leader Chuck Schumer is said to back the House-passed funding measure.
- The World Trade Organisation (WTO) said there is a possibility US President Donald Trump’s tariffs are illegal, Bloomberg reports.
- At 14:00 GMT, the University of Michigan will release its preliminary reading for March:
- The US Consumer Sentiment Index is expected to decline by 63.1, coming from 64.7.
- The US 5-year Consumer Inflation Expectation has no forecast and was at 3.5% in the final February reading.
- Equities are making another attempt to brush off the negative tone for this week. All indices are up over 0.50% across Europe and in the US.
- The CME Fedwatch Tool projects a 97.0% chance for no interest rate changes in the upcoming Fed meeting on March 19. The chances of a rate cut at the May 7 meeting stand at 32.8% and 78.5% at June’s meeting.
- The US 10-year yield trades around 4.329%, off its near five-month low of 4.10% printed on March 4 and after hitting a five-day high on Thursday.
US Dollar Index Technical Analysis: Headline above headline
The US Dollar Index (DXY) shows bearish fatigue after its steep downward correction last week. Volatility in its price action completely eroded, and even the DXY stabilizes on Friday after recovering initial weekly losses. While tensions build-up ahead of reciprocal tariffs taking effect in April, it looks like the US Dollar Index might be on the verge of paring back some of the previous week’s losses when assessing the direction into next week.
Upside risk is a rejection at 104.00 that could result in more downturn. If bulls can avoid that, look for a large sprint higher towards the 105.00 round level, with the 200-day Simple Moving Average (SMA) at 105.02. Once broken through that zone, a string of pivotal levels, such as 105.53 and 105.89, will present as caps.
On the downside, the 103.00 round level could be considered 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
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.
Read the full article here
