US Dollar declines on profit-taking despite strong data
- US Dollar falls on profit-taking after a solid week.
- Flash US PMI signaled solid business activity in October.
- Two more Fed rate cuts in 2024 remain on the table, markets await further data to validate it.
The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, retreated on Thursday, giving up some of the gains accumulated during a solid week marked by a stellar performance. This pullback is attributed to profit-taking following the release of mixed US economic data. Despite positive signals from the flash US S&P PMI, suggesting robust business activity, the Greenback saw losses and is set to consolidate in the next session.
Daily digest market movers: US Dollar declines on profit-taking, S&P PMIs show promising results
- The flash US S&P Global October Composite PMI came in at 54.3, slightly above estimates, with services expanding at 55.3 and manufacturing contracting for the third straight month.
- Despite the overall PMI improvement, employment in the US fell slightly for the third month, reflecting uncertainty ahead of the upcoming presidential election.
- The CME Fedwatch Tool indicates a 90% probability of a 25-basis-point rate cut at the November 7 Fed meeting.
- In the meantime, the US 10-year benchmark remains below the peak reached on Wednesday near 4.20%.
DXY technical outlook: DXY faces resistance, poised for consolidation
The DXY index surged above its 200-day SMA, but buying momentum waned, signaling overextension. The index is poised for sideways consolidation to alleviate overbought conditions per the Relative Strength Index (RSI).
Key support levels include 104.50, 104.30 and 104.00, while resistance lies at 104.70, 104.90 and 105.00.
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.