- The US dollar recovers for the fourth consecutive day this week.
- Tensions in the Middle East along with political commentary in Japan are driving dollar inflows.
- The US Dollar Index tests the upper band of its September range and could break above it if current conditions hold.
The US Dollar (USD) trades firmly again on Thursday, buoyed by safe-haven flows due to rising geopolitical tensions in the Middle East, a weaker Japanese Yen (JPY) and declining odds of another big rate cut. interest from the US Federal Reserve (Fed) in November.
The US dollar already received an additional boost this Thursday in Asian trading after new Prime Minister Shigeru Ishiba said on Wednesday that the economy is not ready for another interest rate increase, sending the JPY lower. The unrest in Lebanon is also supporting the Dollar with safe haven flows.
The economic calendar is set for another very full day. In addition to weekly jobless claims, markets are bracing for the S&P Global Services Purchasing Managers Index and September numbers from the Institute for Supply Management (ISM).
Market Drivers: Foreign Aid for the US Dollar
- New Japanese Prime Minister Shigeru Ishiba said Wednesday that the economy is not ready for another interest rate hike, sending the yen lower, Bloomberg reported. Bank of Japan (BoJ) board member Asahi Noguchi was quick to comment that markets should not respond to every comment politicians make.
- There were also surprising comments from Bank of England (BoE) Governor Andrew Bailey, who told The Guardian newspaper that the BoE may need to start cutting soon and aggressively, Bloomberg reports.
- The US economic calendar started early with Challenger job cuts data for September. About 72,821 jobs were cut compared to 75,891 layoffs in August.
- At 12:30 GMT, weekly jobless claims will be released, with initial claims expected to rise marginally to 220,000 from 218,000.
- At around 13:45 GMT, the final reading of the S&P Global Services Purchasing Managers’ Index for September is expected to remain unchanged from its preliminary reading of 55.4. The composite PMI should also remain stable at 54.4.
- The Institute of Supply Management (ISM) will publish its September numbers for the services sector at 14:00 GMT:
- The headline PMI should come in a little higher at 51.7 versus 51.5 the previous month.
- Looking at the main sub-indices, employment was at 50.2 in August, new orders stood at 53 and prices paid hit 57.3.
- At 14:40 GMT, Federal Reserve Bank of Atlanta President Raphael Bostic participates in a discussion with Minneapolis Fed President Neel Kashkari as part of the 2024 Fall Research Conference of the Institute of Opportunity and Growth.
- European stocks are falling more than US futures after French President Emmanuel Macron announced new taxes. US stock futures fall less than 0.5% with markets still unsettled by the situation in Lebanon and the Middle East.
- The CME Fedwatch tool shows a 67.4% probability of a 25 basis point rate cut at the next Fed meeting on November 7, while 32.6% are pricing in another 50 basis point rate cut .
- The US 10-year benchmark rate is trading at 3.80%, looking to test the three-week high at 3.81%.
US Dollar Index Technical Analysis: Winning streak faces hurdle
The US Dollar Index (DXY) has had a stellar recovery this week, albeit with a little outside help. With the DXY now reaching the upper boundary at 101.90, there could be a risk of a rejection, with the DXY unable to break above the September range. Ideally, the DXY should be able to hold around these levels and have the Non-Farm Payrolls number as a catalyst to push the DXY higher or send it back towards the lower end this month.
The recovery has worked well and could be facing the end of the line for now. This September high at 101.90 is expected to remain the first resistance level on the upside for now. Just above, the 55-day SMA at 102.09 will come into play. A leg higher on the chart identifies 103.18 as the final level for this week’s upside.
To the downside, 100.62 is moving back from resistance to support should DXY close above this level this Tuesday. The new 2024 low is at 100.16, so a test will be done before more decline occurs. Further down, and that means giving up the big 100.00 level, the July 14, 2023 low at 99.58 comes into play.
US Dollar Index: Daily Chart
The 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. According to 2022 data, it is the most traded currency in the world, with more than 88% of all global currency exchange operations, equivalent to an average of $6.6 trillion in daily transactions. After World War II, the USD took over from the pound sterling 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: 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, the Fed 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.
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.
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 portfolio securities in 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.
