- The US Dollar Index shows steady momentum and remains above 106.00.
- Investors will be watching bond auctions in the US as increased supply could drive US yields higher.
- Along with the mid-level reports, the highlight of the week will be the Personal Consumption Expenditure (PCE) data for March.
The US Dollar Index (DXY) rises slightly on Monday and currently stands at 106.20. The strength of the Dollar is due to the strength of the domestic economy and persistent inflationary pressures, which fuel a tougher stance from the Federal Reserve (Fed). Despite a quiet start to the week, the DXY remains resilient, with signs pointing to a possible revalidation of November highs near 107.10.
The U.S. economy is demonstrating enduring strength with rising yields and solid growth, contributing to the strength of the U.S. Dollar. Some Fed officials began to consider raising rates when they saw no progress in inflation. For now, the markets are delaying the start of the relaxation cycle. This week, March Personal Consumption Expenditure (PCE) and Durable Goods, first-quarter Gross Domestic Product (GDP) estimates, and S&P Global PMIs for April will be released in the U.S., which will likely influence prices. expectations about the next Fed decision.
Daily summary of market movements: DXY remains stable awaiting market movements
- A Fed shift toward aggressive monetary policy, coupled with increased supply of U.S. Treasuries, could drive further upward moves in Treasury yields. This scenario can drive new gains for the Dollar following market adjustments to the Fed's actions.
- Based on market expectations, investors assign a 15% probability to a rate cut at the next meeting in June. This probability increases to 45% for a rate cut in July, and even a rate cut in September is only valued at 85% probability.
- Looking at the stock market, US Treasury yields are declining slightly. Specifically, the 2-year yield is 4.97%, the 5-year yield is 4.64%, and the 10-year yield is slightly lower at 4.61%.
DXY Technical Analysis: DXY Bulls Struggle Amid Sideways Indicators
Even though the bullish momentum has stalled, the DXY pair appears well supported by its position above the 20,100 and 200-day simple moving averages (SMA), suggesting continued bullish sentiment.
The RSI, being flat in positive territory, leaves room for possible bullish forays. The lack of a definitive tilt may indicate an ongoing fight between bulls and bears, although it retains a latent potential for bullish behavior. Coinciding with the neutral RSI, the Moving Average Convergence Divergence (MACD) featuring flat green bars indicates sustained but flat buying momentum. Despite occasional declines, the predominant green histogram highlights the resilience of the bulls.
US Dollar FAQ
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 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.
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, 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.
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 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.
