- The Dollar trades lower, returning Thursday’s gains.
- Fed Chairman Jerome Powell surprised markets by casting doubt on an interest rate cut in December.
- The US Dollar Index falls back to the mid-106 level and could face more selling pressure.
The US dollar (USD) falls on Friday, breaking a five-day winning streak, as traders take profits after the Trump-led rally led the dollar to reach its highest level in 2024 on Thursday.
The USD retreats even as traders are rapidly reducing bets on another interest rate cut by the US Federal Reserve (Fed) in December. The latest blow came from Fed Chair Jerome Powell, who in a speech Thursday cast a shadow over the chances of a rate cut in December by noting that the economy is in good shape and the labor market looks healthy. Stocks around the world are not digesting this message well, as this eliminates the chances of a Goldilocks scenario by the end of the year.
The US economic calendar is gearing up for the ever-volatile US retail sales numbers. With the biggest selling season about to begin with Black Friday and holiday shopping, the health of the US consumer before of that season will be a driver for the markets in the short term. The general rule of thumb for retail sales remains that revisions from previous months can be more impactful than actual numbers.
Daily Market Summary: Fed Takes First Strike
- Fed Chairman Jerome Powell’s speech on Thursday surprised markets. Although the Fed is said to remain dependent on data, several traders and strategists point out that the Fed could already be pricing in a Trump trade effect.
- Boston Fed President Susan Collins said in an interview with the Wall Street Journal that a rate cut in December is not assured, while she sees no signs of price pressures.
- At 13:30 GMT, US retail sales for October will be released. Core sales growth is expected to soften slightly to 0.3% from 0.4%. Sales excluding automobiles should also increase 0.3% from the previous month’s 0.5% increase.
- Also at 13:30 GMT, the New York Empire State Manufacturing Index for November will be published. The number is expected to be just below the contraction barrier, with an expected -0.7, versus the previous major contraction.
- October industrial production is expected to be released at 14:15 GMT. Another monthly contraction of 0.3% is expected.
- Federal Reserve Bank of Boston President Susan Collins will give a welcome speech at the 68th Economic Conference hosted by the Boston Fed at 14:00 GMT.
- Federal Reserve Bank of New York President John Williams will give a keynote address at the New York Fed alumni event in New York around 18:15 GMT.
- Shares in Asia closed quite mixed this Friday. Japanese stocks closed higher on Friday, while Chinese indices closed lower. US futures are falling, with the Nasdaq flirting with a 1% loss early in the day.
- The CME FedWatch tool is pricing another 25 basis point (bps) rate cut by the Fed at the December 18 meeting at 58.7%. A 41.3% probability is for rates to remain unchanged. Although the rate cut scenario is the most likely, traders have significantly reduced some rate cut bets compared to a week ago.
- The US 10-year benchmark rate is trading at 4.43%, just below Thursday’s high of 4.48%.
US Dollar Index Technical Analysis: The Logical Side
The US Dollar Index (DXY) is seeing a small drop this Friday, although warnings should be issued as Powell’s comments are positive for the US Dollar. The Fed signals that it will likely pause its cutting cycle, while, for example, the European Central Bank (ECB) will likely continue with a series of rate cuts. This would widen the interest rate gap between the two nations and support the US dollar as a high-yielding currency against other currencies.
As of now, the round level of 107.00 remains in play after Thursday’s strong rejection. A new yearly high has already been recorded at 107.07. A two-year high could be reached if the 107.35 level is broken.
On the downside, a new set of supports is coming into play. First support is 105.93, Tuesday’s closing level. A little further down, the crucial 105.53 (April 11 high) should prevent any decline towards 104.00.
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.
