US Dollar weakens despite positive data, Fed decision looms
- The Dollar Index remains under heavy pressure, slipping below 108.00 and testing the critical 107.00 level.
- New Home Sales in December beat estimates, rising to 698,000 units versus expectations of 670,000.
- President Trump’s tariff threats on Colombia imports and Wednesday’s Federal Reserve decision add uncertainty to the Dollar’s trajectory.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against a basket of currencies, continues to slide on Monday, breaking below the psychological 108.00 mark. Concerns over AI-related market valuation, combined with geopolitical tensions from President Donald Trump’s tariff threats against Colombia, contribute to bearish sentiment. Economic data highlights some resilience in the United States (US) economy, but the Dollar remains under pressure ahead of the Federal Reserve’s (Fed) Wednesday decision on interest rates.
Daily digest market movers: US Dollar under pressure amid Fed anticipation and geopolitical tensions
- The Chicago Fed National Activity Index for December rebounded to 0.15 from -0.01 in November, reflecting stronger economic activity.
- December New Home Sales surged to 698,000 units, surpassing the forecast of 670,000 and November's 674,000 figure.
- President Trump’s proposal to impose 50% tariffs on Colombian imports over deportation disputes rattles trade markets and global sentiment.
- Markets will look for further clues on the incoming president’s plans on tariffs on its North American neighbors.
- Federal Reserve’s Wednesday meeting looms large; markets are watching closely for updates on rate decisions and economic outlook with a hold priced in.
- Both the statement and Chair Jerome Powell’s tone will be closely looked upon by the markets.
DXY technical outlook: Bearish momentum builds further
The US Dollar Index remains below 108.00, showing persistent downward momentum. The Relative Strength Index (RSI) continues to linger under the neutral 50 mark, indicating weak relative strength. Meanwhile, the Moving Average Convergence Divergence (MACD) histogram deepens in the red, signaling intensifying bearish pressure. Although the index is testing oversold conditions, the downside risks remain, with the potential to breach 107.00. A corrective bounce could occur if the movement becomes overstretched, but recovery beyond 108.50 appears challenging unless sentiment shifts significantly. For now, the path of least resistance points further downward.
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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