The US Dollar (USD) is heading higher in what looks to become a rally for this week with a four-day winning streak. Comments overnight from US Treasury Secretary Janet Yellen and the FOMC Minutes only confirmed that the current play with the USD as safe haven is still very much valid. Meanwhile US debt-ceiling talks ended again unresolved but with good progress according to US House Speaker Kevin McCarthy.
On the macroeconomic data front, traders can look at the second estimate of US Gross Domestic Product (GDP) numbers for the 1st quarter at 12:30 GMT. Initial Jobless Claims at that same time will show a glimpse of how the employment market is doing. Throughout the day it will be worth wild to keep an eye on 1-year US Treasury Bills (T-bills) as they have been soaring to 7% on Wednesday, with US Credit Default Swaps (CDS) back at the highs. Fed officials are set to speak with Thomas Barkin talking at 13:30 GMT at an Economic Forum and then Susan Collins at 14:30 GMT.
The US Dollar Index (DXY) has taken out both the 55-day and the 100-day Simple Moving Averages (SMA), respectively, at 102.43 and 102.85 on the upside. The safe haven status keeps seeing bids for the DXY with 104 having been broken early on Thursday, during the European trading session. The next target becomes 105.
On the upside, 105.74 (200-day SMA) still acts as long-term price target to hit, as the next upside key level for the US Dollar Index is at 104.00 (psychological, static level), and acts as an intermediary element to cross the open space.
On the downside, 102.85 (100-day SMA) aligns as the first support level to confirm a change of trend. In the case that breaks down, watch how the DXY reacts at the 55-day SMA at 102.48 in order to assess any further downturn or upturn.
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.
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