US Dollar marches higher, nears multi-month highs
- Dollar and US Treasury yields continue to march higher.
- IMF raised its US economic growth projections to 2.8% (+0.2 ppt) for 2024.
- The recent Fed Beige Book indicated that inflation had continued to moderate.
The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, rose near a three-month high as traders flocked to the US Dollar on Wednesday.The rally was driven by persistent global economic divergence, a more hawkish Federal Reserve (Fed), and upbeat US growth projections by the International Monetary Fund (IMF). The Fed Beige Book hinted at moderating inflation and sustained economic activity.
The robust US economy and election uncertainties continue to bolster the US Dollar.The IMF upgraded its US growth forecasts, projecting 2.8% growth for this year and 2.2% for next year. The US outpaces its peers as IMF lowered eurozone growth forecasts to 0.8% for this year and 1.2% for next year. Economic divergence favors the US Dollar, contributing to monetary policy divergence that supports its strength. The Fed Beige Book indicates moderating inflation with selling prices increasing modestly across most districts. Economic activity remains mostly unchanged since early September with some districts reporting modest growth.
Daily digest market movers: US Dollar rises on election uncertainties, strong economy
- The robust US economy and election uncertainties continue to bolster the US Dollar.
- The IMF upgraded its US growth forecasts, projecting 2.8% growth for this year and 2.2% for next year.
- The US outpaces its peers as IMF lowered eurozone growth forecasts to 0.8% for this year and 1.2% for next year.
- Economic divergence favors the US Dollar, contributing to monetary policy divergence that supports its strength.
- The Fed Beige Book indicates moderating inflation with selling prices increasing modestly across most districts.
- Economic activity remains mostly unchanged since early September with some districts reporting modest growth.
DXY technical outlook: DXY sees more gains, will eventually correct
The DXY index has surged above its 200-day SMA, indicating a positive trend. The Relative Strength Index (RSI) is in overbought territory, suggesting a potential correction. Supports at 104.50, 104.30 and 104.00 may provide downside protection.
Resistance levels at 104.70, 104.90 and 105.00 could limit the index's upside momentum. The index's performance relative to its Simple Moving Average (SMA) and Moving Average Convergence Divergence (MACD) should be monitored for further confirmation.
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.