Created
: 2024.10.31
2024.10.31 19:32
The US Dollar Index (DXY) edges down on Thursday, extending the mild losses seen over the last four sessions. Still, the US Dollar (USD) remains near three-month highs and is on track to close its best monthly performance in more than two years.
US macroeconomic data continues endorsing the rhetoric of a strong economy in a period of global slowdown, which gives the USD a competitive advantage against the rest of the major currencies.
The ADP employment report beat expectations on Wednesday, easing concerns about a deterioration of the labour market and improving investors' expectations about Friday's Nonfarm Payrolls (NFP) report.
The DXY index maintains its bullish bias intact but failure to break the resistance area above 104.55 has increased the bearish pressure, sending prices to test the bottom of the recent range at 103.90.
The 4-hour Relative Strength Index (RSI) shows a bearish divergence, and price action has crossed below the 50-period Simple Moving Average (SMA). These are negative signs. Further depreciation below 103.90 would confirm a deeper correction and bring 103.40 into focus. Resistances remain at at the 104.55-104.75 area and 105.20.
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.
Created
: 2024.10.31
Last updated
: 2024.10.31
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