The US Dollar: A Comprehensive Analysis by the World’s Top Investment Manager
- The US Dollar remains stable as the week comes to a close, showing overall gains.
- Traders anticipate the release of the US PPI data while Federal Reserve speakers continue to hint at future rate cuts.
- The US Dollar Index struggles to break above the 103.00 mark, trading above 102.50.
As the US Dollar (USD) steadies itself on Friday following a robust rally earlier in the week, the driving force behind its performance appears to be the rate differential. Looking ahead to next week, investors are questioning whether the recent surge in US Treasury rates may have been excessive, particularly in light of the marginal increase in the US Consumer Price Index (CPI) for September compared to the previous month. This stands in contrast to the statements made by several Federal Reserve (Fed) officials this week, who have indicated that further interest rate cuts are on the horizon.
The upcoming economic calendar events will serve as the final pieces of the puzzle for this week. The release of the US Producer Price Index (PPI) data for September will shed light on whether inflationary pressures are also evident in the production sector. Additionally, the preliminary reading from the University of Michigan on Consumer Sentiment and inflation expectations for October will provide further insights into the economic landscape.
Daily Digest of Market Movers: Key Highlights to Watch Out For
- At 12:30 GMT, the US Producer Price Index figures for September will be unveiled:
- The monthly headline PPI is projected to rise by 0.1% from the previous month’s 0.2%, with core PPI showing a similar decline to 0.2% from 0.3%.
- Yearly headline PPI inflation is expected to decrease to 1.6% from August’s 1.7%, while core PPI is anticipated to increase to 2.7% from 2.4%.
- At 14:00 GMT, the University of Michigan’s preliminary reading for October will be released:
- Consumer Sentiment is forecasted to rise to 70.8 from 70.1.
- 5-year consumer inflation expectations stood at 3.1% in September, with no forecast available for the upcoming release.
- The data could be impacted by the recent hurricanes in the Southern US region.
- Several Federal Reserve speakers are scheduled to make appearances on Friday:
- At 13:45 GMT, Austan D. Goolsbee, head of the Federal Reserve Bank of Chicago, will deliver opening remarks at the Community Bankers Symposium.
- At 17:10 GMT, Federal Reserve Governor Michelle Bowman, a 2024 FOMC voting member, will give a virtual speech on community banking at the Federal Reserve Bank of Chicago Community Bankers Symposium.
- Equities are experiencing mixed movements on Friday, with major European indices trending downwards, while US futures show a flat to lower trajectory.
- The CME Fedwatch Tool indicates an 84.0% probability of a 25 bps interest rate cut at the next Fed meeting on November 7, with a 16.0% chance of no rate cut. Expectations for a 50 bps rate cut have been completely eliminated.
- The US 10-year benchmark rate is currently trading above 4.09%.
US Dollar Index Technical Analysis: Navigating the Current Landscape
The US Dollar Index (DXY) has witnessed a rapid ascent this week, as market participants adjust their positions amidst growing speculation of imminent interest rate cuts throughout 2024. Despite the vocal affirmations from Fed officials regarding further rate cuts, the current trajectory of US Treasury rates does not align with this narrative. The future movement of the DXY hinges on whether markets completely discount any rate cuts for 2024, potentially propelling the index above the 103.00 mark, or if a reversal occurs with US rates declining.
The psychological barrier of 103.00 represents the initial challenge on the upside. Subsequent levels include 103.18 as the ultimate resistance for the week. Beyond that, a complex zone emerges, featuring the 100-day Simple Moving Average (SMA) at 103.26, the 200-day SMA at 103.77, and critical levels at 103.99-104.00.
On the downside, the 55-day SMA at 101.91 acts as the primary support, followed by the round level of 102.00 and the pivotal 101.90 level. In the event of further bearish pressure, 100.62 serves as additional support, with a potential test of the year-to-date low at 100.16 before further downside. Ultimately, breaching the significant 100.00 mark would bring the July 14, 2023, low of 99.58 into focus.
US Dollar Index: Daily Chart
US Dollar FAQs: Insights into the World’s Most Traded Currency
The US Dollar (USD) serves as the official currency of the United States of America and holds a prominent position in various other nations where it circulates alongside local currencies. Accounting for over 88% of global foreign exchange turnover, the USD is the most extensively traded currency worldwide, with an average daily transaction volume of $6.6 trillion as of 2022. Following World War II, the USD replaced the British Pound as the world’s reserve currency. Historically, the US Dollar was backed by Gold until the dissolution of the Gold Standard under the Bretton Woods Agreement in 1971.
The primary factor influencing the value of the US Dollar is monetary policy, shaped by the Federal Reserve (Fed). With dual mandates of maintaining price stability (controlling inflation) and promoting full employment, the Fed adjusts interest rates to achieve these objectives. When inflation surpasses the Fed’s 2% target or unemployment rates are elevated, the Fed may raise interest rates to bolster the USD value. Conversely, a decline in inflation or high unemployment rates may prompt the Fed to lower interest rates, exerting downward pressure on the Greenback.
In extraordinary circumstances, the Federal Reserve can resort to measures like quantitative easing (QE) to inject liquidity into a stagnant financial system. QE involves the substantial expansion of credit flow when traditional rate adjustments prove insufficient. This unconventional policy tool was employed during the Great Financial Crisis in 2008 to combat credit constraints and typically leads to a weaker US Dollar. On the contrary, quantitative tightening (QT) involves the Fed halting bond purchases and refraining from reinvesting maturing bond proceeds, often strengthening the US Dollar.
Understanding these dynamics is essential for grasping the complexities of the US Dollar’s movements and its significance in the global economy.