- US Dollar Index weakens towards 107.00.
- Profit-taking after strong rallies in November put downward pressure on the Dollar.
- Expectations of a lower US corporate tax rate and a wave of deregulation should boost foreign portfolio flows and FDI into the US.
The US Dollar Index (DXY) retreated from its new two-year high on Friday, weakening towards 107.00. The US calendar will not feature any notable events in Monday’s session.
The US Dollar Index (DXY) remains bullish despite a recent pullback from a two-year high. Strong economic data and a less dovish stance from the Federal Reserve support the index’s upward trajectory. In addition, geopolitical tensions due to the war between Russia and Ukraine have contributed to the rise.
Daily Market Summary: US Dollar Holds Firm Despite Setback, Trump’s Policies Could Help Rising
- The robust US economy is outperforming other advanced economies.
- Trump’s proposed policies will likely prolong the Fed’s tightening policy and the US is anticipated to see an increase in foreign investment due to potential tax cuts and deregulation.
- Higher real interest rates are predicted due to the favorable US productivity outlook.
- For the rest of the week, investors will be watching the Gross Domestic Product (GDP) and Personal Consumption Expenditure (PCE) numbers due out on Thursday and Friday as they could shake up the USD.
- Thursday’s jobless claims will also be important.
DXY Dollar Index Technical Outlook: Index consolidates after pullback from highs, bullish bias intact
Technical indicators suggest a possible period of consolidation due to overbought conditions, with the Relative Strength Index (RSI) relaxing from overbought levels and the Moving Average Convergence/Divergence (MACD) histogram contracting. Despite the consolidation, the overall uptrend remains intact, with resistance at 108.00 and support in the 106.00-106.50 area. The bulls must hold this area to preserve the bullish momentum.
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.
