US Dollar strength continues as market adjusts to Consumer Sentiment collapse
- DXY rally extends into Friday, hitting its highest level since early May.
- Consumer Confidence from the UoM figures come in below expectations, dampening the market mood, but DXY maintains its daily gains.
- US Treasury yields remain low, signaling a risk-off market environment.
On Friday, the US Dollar Index (DXY) shrugged off weak data releases and continued its positive traction. The Index now hovers around its highest level since early May near 105.80 and then retreated to 105.60 but held daily gains.
The economic outlook for the US remains a mixed bag. The Federal Reserve (Fed) continues to hold its economic activity revisions steady but revised its Personal Consumption Expenditures (PCE) estimates higher. Additionally, preliminary analysis suggests softening inflation but a resilient labor market, pushing the Fed to anticipate fewer rate cuts. On Friday,
Consumer Confidence data from the University of Michigan showed poor results that reached a seven-month low. This made the USD trim part of its daily gains as much of the US economy revolves around consumer spending.
Daily digest market movers: DXY holds the line after UoM data, markets adjust to Fed’s decision
- On Wednesday, FOMC dot plot update shows median expectancy of only one rate cut for 2024.
- Markets were previously anticipating between one or two rate cuts in 2024, but this altered after the Fed announced its decision.
- University of Michigan Consumer Confidence Index for the US has fallen from 69.1 in May to 65.6 in early June, which is below the market's expectation of 72. This decline also reflected in the Current Conditions Index, falling from 69.6 to 62.5.
- Consumer expectation index also fell slightly from 68.8 to 67.6. The five-year inflation outlook rose from 3% to 3.1%.
DXY technical analysis: Bulls continue to dominate, holding above SMAs
As of Friday’s session, the technical indicators maintain their positive outlook. The Relative Strength Index (RSI) remains above 50 and the Moving Average Convergence Divergence (MACD) continues to reflect green signaling bars. Furthermore, the index remains standing above its 20, 100 and 200-day Simple Moving Average (SMA). The combination of these factors strengthens the bullish outlook for 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.
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