- The DXY fell for a third consecutive day and hit a more than one-week low on Friday.
- Bets on a further Fed rate cut are keeping US bond yields depressed and exerting some pressure.
- Investors now await the key US NFP report before opening fresh directional positions.
The US Dollar Index (DXY), which tracks the value of the greenback against a basket of currencies, extends this week’s slide from the vicinity of the 102.00 level and continues to lose ground for the third consecutive day on Friday. The downward trajectory drags the index below the round figure of 101.00, or to a more than one-week low during the first half of the European session, as traders now await crucial US employment details for a fresh boost.
The popularly known Non-Farm Payrolls (NFP) report will play a key role in influencing market expectations on the Federal Reserve (Fed) policy path and determining the next directional move of the DXY. Meanwhile, bets on a larger interest rate cut later this month, supported by a mix of US employment data released this week, provided evidence of a deteriorating labor market. In fact, a report on Wednesday showed that US job openings fell to a three-and-a-half-year low of 7.673 million in July.
Adding to this, Automatic Data Processing (ADP) reported on Thursday that private sector employment posted the smallest increase since January 2021 and rose by 99,000 in August. In addition, Chicago Fed President Austan Goolsbee said on Friday that the long-term trend in labor market and inflation data warrants a policy of cutting interest rates soon and then steadily over the next year. This keeps US Treasury bond yields depressed at their lowest levels in more than a year and continues to undermine demand for the dollar.
With the latest drop, the DXY has reversed a large portion of last week’s recovery gains from the yearly low and remains on track to post a third week of losses in the past four. Moreover, the aforementioned fundamental backdrop appears to tilt firmly in favor of the bears and suggests that the path of least resistance for the index remains to the downside. That said, an upbeat US jobs report could trigger a short-covering rally, although the immediate market reaction is more likely to be limited and dissipate quickly.
US Dollar FAQs
The United States 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 in circulation alongside local banknotes. As of 2022, it is the most traded currency in the world, accounting for over 88% of all global foreign exchange transactions, equivalent to an average of $6.6 trillion in daily transactions. Following World War II, the USD took over from the British Pound as the world’s reserve currency.
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: to achieve price stability (control inflation) and to promote full employment. Its main tool for achieving these two goals is to adjust interest rates. When prices rise too quickly and inflation exceeds the Fed’s 2% target, the Fed raises rates, which helps 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.
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 jammed financial system. It is an unconventional policy measure used when credit has dried up because banks are not lending to each other (for 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 of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, primarily from financial institutions. QE typically leads to a weakening of the 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 of maturing securities in new purchases. It is generally 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.
