- The DXY is trading near 106.80 on Tuesday.
- The market’s focus shifts to the Fed’s next decision on Wednesday.
- Retail sales fail to boost enthusiasm for the US dollar.
The US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, is trading with gains around 106.80 on Tuesday as bullish momentum stalls following the release of November retail sales. The market’s focus remains on the Federal Reserve’s (Fed) interest rate decision on Wednesday, with a 25 basis point cut already priced in.
Market Drivers: US Dollar Stagnates as Markets Evaluate Retail Sales Figures
- The Federal Open Market Committee’s two-day meeting begins Tuesday as economic fundamentals suggest the Federal Reserve should not cut rates.
- November retail sales data slightly beat forecasts but failed to trigger fresh buying of US dollars; traders weigh marginal revisions and mixed underlying details.
- Monthly retail sales grew 0.7%, beating the estimate of 0.5%, while the previous figure was revised upwards to 0.5% from 0.4%.
- Growth remains strong: The New York Fed’s Nowcast model tracks 1.9% SAAR growth in the fourth quarter, while the Atlanta Fed’s GDPNow sits at 3.3%.
- Markets still anticipate a 25 basis point rate cut on Wednesday, with a greater than 95% probability, even as economic data questions the need for immediate easing.
DXY Technical Outlook: Indicators improve, but bullish momentum fades
US Dollar indicators regained significant ground last week, but the index lacks the strength to retest the 107.00–108.00 zone. On Monday, the index retreated. Although it is trading near 106.30 on Tuesday, the overall outlook remains constructive if it can hold above its 20-day SMA.
Persistent growth and upbeat US data may keep the Dollar supported, but caution is advised until a decisive break above short-term resistance levels is seen.
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.
