- The US Dollar outperforms its rivals as markets adopt a cautious stance.
- The US Dollar Index climbed to its highest level since July 7 above 102.50.
- USD benefits from souring market mood after Fitch downgraded US credit rating.
The US Dollar gathered strength against its rivals after Tuesday’s indecisive trading. The USD Index – which tracks the USD’s valuation against a basket of six major currencies – held above 102.00 despite the pullback seen in the American session on Tuesday and advanced to a 25-day-high above 102.50 on Wednesday.
Global rating agency Fitch announced late Tuesday that it downgraded the US government’s credit rating to AA+ from AAA, citing anticipated fiscal deterioration over the next three years and a high and growing general government debt burden. This development caused market participants to stay away from risk-sensitive assets, allowing the USD to find demand as a safe haven.
The US private sector employment rose by 324,000 in July, the data published by Automatic Data Processing (ADP) showed on Wednesday. This reading surpassed the market expectation for an increase of 189,000 and provided further support to the USD. June’s figure was revised lower from 497,000 (the highest since February 2022) to 455,000.
“The economy is doing better than expected and a healthy labor market continues to support household spending,” said Nela Richardson, chief economist, ADP. “We continue to see a slowdown in pay growth without broad-based job loss.”
Daily digest market movers: US Dollar rally picks up steam midweek
- 10-year US Treasury bond yield holds steady above 4% following Tuesday’s upsurge.
- Wall Street’s main indexes opened deep in negative territory on Wednesday. At the time of press, the S&P 500 and the Nasdaq Composite indexes were down 1% and 1.6%, respectively.
- The number of job openings on the last business day of June stood at 9.58 million, the US Bureau of Labor Statistics (BLS) reported in the Job Openings and Labor Turnover Survey (JOLTS) on Tuesday. This reading followed 9.61 million openings in May and came in slightly below the market expectation of 9.62 million.
- US ISM Manufacturing PMI improved modestly to 46.4 in July from 46 in June. This reading came in below the market expectation of 46.8 and showed an ongoing contraction in the manufacturing sector’s business activity.
- The Employment component of the ISM PMI survey declined to 44.4 from 48.1.
- “Banks reported that, on balance, levels of standards are currently on the tighter end of the range for all loan categories. Compared with the July 2022 survey, banks reported tighter levels of standards in every loan category,” the Fed said in the July 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS).
- The ISM reported on Monday that the Chicago PMI improved to 42.8 in July from 41.5 in June.
- The Federal Reserve Bank of Dallas’ Texas Manufacturing Survey revealed that the headline Manufacturing Business Index edged higher to -20 in July from -23.2 in June.
- Inflation in the US, as measured by the change in Personal Consumption Expenditures (PCE) Price Index, fell to 3% on a yearly basis in June from 3.8% in May, the US Bureau of Economic Analysis reported on Friday. This reading came in below the market expectation of 3.1%.
- Core PCE Price Index, the Federal Reserve’s preferred gauge of inflation, arrived at 4.1% on a yearly basis, down from 4.6% in May and below the market forecast of 4.2%. Further details of the publication revealed that Personal Income and Personal Spending increased 0.3% and 0.5% on a monthly basis, respectively.
- In an interview with CBS over the weekend, Minneapolis Federal Reserve Bank President Neel Kashkari said that he was not sure whether the Fed was done raising rates. Commenting on the jobs markets, Kashkari noted that it would not surprise him to see the unemployment rate tick up slightly.
- The Fed raised its policy rate by 25 basis points (bps) to the range of 5.25%-5.5% following the July policy meeting as expected. In the post-meeting press conference, Fed Chairman Jerome Powell refrained from confirming another rate hike this year and said that every policy meeting will be live. “If we see inflation coming down credibly, we can move down to a neutral level and then below neutral at some point,” Powell told reporters, noting that the policy was already restrictive.
Technical analysis: US Dollar Index climbs above key technical level
The US Dollar Index (DXY) rose above 102.50 on Wednesday, where the 50-day and the 100-day Simple Moving Averages are located. In case DXY manages to end the day above that level, 103.00 (psychological level, static level), 103.70 (200-day SMA) and 104.30 (static level from May) could be set as next bullish targets.
Looking south, sellers could show interest if DXY returns below 102.50. In that scenario, 102.00 (psychological level, static level), 101.30 (20-day SMA) and 101.00 (psychological level, static level) could be seen as support levels.
US Dollar FAQs
The US 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 found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
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 in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering 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 in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
Source: https://www.fxstreet.com/news/us-dollar-rises-as-market-mood-sours-following-us-credit-rating-downgrade-202308021226