US Dollar extends gains as US yields rise

26 Oct 2023, 00:49 · Views 54

The US Dollar extended Tuesday’s impressive gains, but the upward momentum is somewhat weak.
The United States reported positive housing market data.
The 5- and 10-year US Treasury yields recovered, while the shorter-term 2-year rate declined.

The US Dollar (USD) measured by the US Dollar Index (DXY) continued climbing higher on Wednesday, rising above the 20-day Simple Moving Average (SMA) towards a six-day high of 106.52. US yields' recovery and positive housing market data allowed the Greenback to find demand.

The focus is on the United States' economic situation as markets await data to continue modeling their expectations on the next Federal Reserve (Fed) decisions. As for now, the strongest case is that the bank won’t deliver any additional hikes in 2023, but Gross Domestic Product (GDP) preliminary estimates from Q3 on Thursday and Personal Consumption Expenditures (PCE) figures from September on Friday may change those expectations.

Daily Digest Market Movers: US Dollar edges higher while investors await economic activity figures

The DXY index jumped towards 106.2, above the 20-day Simple Moving Average (SMA).
The US Census Bureau revealed that September New Home Sales came in higher than expected. The headline figure showed 0.759M new home sales, higher than the consensus of 0.68M, and increased in relation to its last reading of 0.676M.
The 5- and 10-year US yields rose sharply to 4.87% and 4.90%, respectively.
Focus now shifts to high-tier data to be released on Thursday and Friday. The US Q3 GDP growth is expected to have accelerated, and the PCE inflation to have decelerated in September.
According to the CME FedWatch Tool, the odds of a 25 basis points hike in December are still low, around 25%. In addition, the tool suggests that a pause in November is nearly priced in.

Technical Analysis: US Dollar Index bulls step in and conquer the 20-day SMA

Based on the daily chart, the DXY Index maintains a neutral to bullish technical perspective after buyers conquered the 20-day Simple Moving Average (SMA). With a positive slope above its midline, the Relative Strength Index (RSI) signals a bullish stance, while the Moving Average Convergence (MACD) exhibits lower red bars. Moreover, the DXY is above the 20, 100 and 200-day SMAs, suggesting that on the bigger picture, the bulls are in command over the bears.

Supports: 106.30 (20-day SMA), 106.00, 105.70.
Resistances:106.50, 107.00, 107.30.

US Dollar FAQs

What is the US Dollar?

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.

How do the decisions of the Federal Reserve impact the US Dollar?

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.

What is Quantitative Easing and how does it influence the US Dollar?

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.

What is Quantitative Tightening and how does it influence the 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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