- The US Dollar Index (DXY) fell to 106.20, down 0.40%.
- US government bond yields are falling, while Wall Street indices are rising.
- The focus is on Friday’s October Nonfarm Payrolls report.
The dollar fell on Thursday and the US Dollar Index (DXY) retreated to 106.20, driven by dovish bets from the Federal Reserve (Fed) and the drop in US bond yields following Wednesday’s decision and the president’s tone Powell. All eyes are now on Friday’s October Non-Farm Payrolls (NFP) report, which could set the tone for the dollar in the short term and extend its losses.
The Federal Reserve (Fed) and its president, Jerome Powell, welcomed the latest data, which shows that the US economy remains strong, and noted that the pace of job creation and inflation are slowing. In addition, Powell implied that the entity has significantly tightened its monetary policy and that in upcoming decisions it will take into account the tightening of financial conditions and the cumulative effects of monetary policy.
Daily summary of market movements: The dollar falls due to the Fed’s moderate bets and the weakness of the labor market
- The US Dollar Index (DXY) plunged below the 20-day SMA towards 106.20, down 0.40%.
- Ahead of Friday’s October NFP, weak labor market data was reported in the US.
- Third-quarter unit labor costs fell 0.8% quarter-on-quarter, while markets were expecting a 0.7% expansion.
- Additionally, the US Department of Labor revealed that initial jobless claims for the week ending October 28 were higher than expected. Jobless claims stood at 217,000, above the consensus of 210,000 and up from its last reading of 212,000.
- On the other hand, US Treasury yields are falling sharply. The 2-year bond yield fell to 4.98%, while longer-term rates, 5 and 10 years, retreated towards 4.63% and 4.67%, making it difficult for the US dollar to find demand.
- According to CME’s FedWatch tool, the odds of a 25 basis point hike in December remain low, around 20%, adding more pressure to the dollar.
Technical Analysis: Dollar Index bulls give in and miss 20-day SMA
Technical analysis of the daily chart suggests a neutral to bearish stance for the US Dollar Index (DXY), as the bears strive to recover and exert their presence. The Relative Strength Index (RSI) is pointing south below its midline, while the Moving Average Convergence Histogram (MACD) is showing rising red bars. Furthermore, the index is below the 20-day SMA, which could pave the way for further bearish moves in the short term.
That said, the DXY remains above the 100-day and 200-day SMA, pointing to the strength of the bulls in a broader context.
Supports: 106.00, 105.70, 105.50
Resistances: 106.30 (20-day SMA), 106.50,106.90.
Frequently Asked Questions about the US Dollar
What is the US Dollar?
The United States Dollar (USD) is the official currency of the United States of America and the “de facto” currency of a large number of countries where it circulates alongside local banknotes. According to 2022 data, it is the most traded currency in the world, with more than 88% of all global currency exchange operations, that is, an average of 6.6 trillion dollars in daily transactions.
After World War II, the USD took over from the pound sterling as the world’s reserve currency. For most of its history, the US dollar was backed by gold, until the Bretton Woods Agreement of 1971.
How do the decisions of the Federal Reserve affect the Dollar?
The single most important factor influencing the value of the US Dollar is monetary policy, which is determined by the Federal Reserve (Fed). The Fed has two mandates: achieve price stability (control inflation) and promote full employment. Your main tool to achieve these two objectives is to adjust interest rates.
When prices rise too quickly and inflation exceeds the 2% target set by the Fed, it raises rates, which favors the price of the Dollar. When Inflation falls below 2% or the Unemployment Rate is too high, the Fed can lower interest rates, which weighs on the Dollar.
What is Quantitative Easing and how does it influence the Dollar?
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 into a clogged financial system.
This is an unconventional policy measure used when credit has dried up because banks do not lend to each other (for fear of counterparty default). It is a last resort when a simple lowering of 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 of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, primarily from financial institutions. QE usually leads to a weakening of the US Dollar.
What is quantitative tightening and how does it influence the US dollar?
Quantitative tightening (QT) is the reverse process by which the Federal Reserve stops purchasing bonds from financial institutions and does not reinvest the principal of maturing bonds into new purchases. It is usually positive for the US dollar.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
