US Dollar Index Gains for Fourth Straight Day
The US Dollar Index (DXY), which tracks the US Dollar’s value against six key currencies, is on an upward trajectory for the fourth consecutive day, trading close to 101.20 during European hours on Thursday.
The Greenback’s rise is fueled by a prevailing hawkish sentiment regarding the Federal Reserve’s (Fed) policy outlook. This upward momentum received a boost from the latest Flash US S&P Global PMI data for September, showing manufacturing growth exceeding expectations at 52.0. This performance helped offset some minor dips in composite and services activity.
According to the CME FedWatch Tool, there’s been a significant jump in market expectations for a 25-basis-point interest rate hike by the Fed in October, soaring to nearly 69%, up from 55.4% just a day earlier. Market watchers are now keenly awaiting the upcoming report on weekly Initial Jobless Claims, as several Fed officials continue to endorse the recent rate hikes and caution against ongoing inflation concerns.
US 10-Year Treasury Yield Continues to Rise
Strategists from Societe Generale have observed that the US 10-year Treasury yield has surpassed its 2023 peak of 5.02%, indicating an extension of its upward trend. They note that it is now testing the upper limit of a multi-month ascending channel. While they acknowledge that this latest upward movement seems somewhat stretched, they also point out that indications of a significant pullback are still not apparent, implying that the trend might remain intact for the time being.
Technical Insights: DXY’s Bullish Trending
Looking at the daily chart, the Dollar Index Spot is currently at 101.20. The index is exhibiting a clear bullish trend, with prices above both the nine-period Exponential Moving Average (EMA) at 100.43 and the 50-period EMA at 99.85, suggesting a supportive underlying structure. The 14-day Relative Strength Index (RSI) stands at 72.34, indicating overbought conditions. This could mean that while the upswing may seem overextended, a reversal is not yet on the horizon, especially with the rising FXS Fed Sentiment Index at 148.81 which bolsters a favorable environment for the dollar.
On the downside, immediate support is identified at the nine-day EMA, with a more substantial technical floor at the 50-day EMA, should corrective pressure arise. As long as the Dollar Index remains above these moving averages, the path of least resistance is upward. Any pullbacks are likely to be viewed as consolidations within the prevailing bullish trend, rather than as signs of a lasting downturn.
FAQs About the US Dollar
The US Dollar (USD) serves as the official currency of the United States and is widely used in several other countries alongside local currencies. It is, interestingly, the most heavily traded currency globally, making up over 88% of all foreign exchange transactions, which averages around $6.6 trillion daily, based on 2022 figures. After World War II, the USD replaced the British Pound as the dominant reserve currency worldwide. Historically, the dollar was backed by gold until the Bretton Woods Agreement in 1971 led to the end of the Gold Standard.
Monetary policy, shaped by the Federal Reserve (Fed), is the most significant factor affecting the value of the US Dollar. The Fed aims to maintain price stability and promote full employment, primarily by adjusting interest rates. When inflation exceeds the Fed’s 2% target, it typically raises rates, boosting the dollar’s value. Conversely, lower rates can weaken the Greenback if inflation dips below 2% or the unemployment rate rises too high.
In exceptional circumstances, the Fed might resort to printing more dollars and implementing quantitative easing (QE), which increases credit flow in stagnant financial conditions. QE is a non-standard approach taken when traditional methods, like lowering interest rates, prove insufficient. It was prominently adopted during the Great Financial Crisis in 2008. This process usually results in a weaker dollar as the Fed purchases US government bonds from financial institutions.
On the other hand, quantitative tightening (QT) represents the opposite strategy, characterized by the Fed refraining from bond purchases and not reinvesting proceeds from maturing bonds into new ones. QT generally has a positive impact on the US Dollar.
