The US Dollar Index (DXY) is hovering around 104.20, trading with mild gains against its rivals on Tuesday. After Durable Goods and Housing market data, the USD remains stable as markets await fresh drivers to continue placing their bets on the next Federal Reserve (Fed) decisions.
The US economy is on a delicate path with inflation remaining sticky and economic activity showing some weakness. Jerome Powell confirmed the bank’s persistence in not overreacting to hot inflation figures from the start of the year while the bank didn’t change its interest rate projections from 2024. The start of easing is still seen starting in June, but incoming data will continue dictating the timing.
On the daily chart, the Relative Strength Index (RSI) paints a picture of flat momentum, suggesting a tie between buying and selling pressure. Simultaneously, the Moving Average Convergence Divergence (MACD) offers a flat trajectory with green bars, indicating a stagnation in buying power, which might be a sign of bulls taking a breather.
Despite the short-term sluggishness, the scene over a wider time horizon appears encouraging. The DXY is well-positioned above the 20, 100, and 200-day Simple Moving Averages (SMAs), a strong sign of the bulls’ sizable control and an overall bullish tendency.
To add more context, the market is coming off a successful 1% winning week, which could explain the current pause in upward momentum. Traders could use this breather to re-assess the market and potentially find new entries for a continued bull trend.
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 increase 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.
