US Dollar extends rally as markets defy Fed’s view on interest-rate cuts
- The US Dollar jumps higher for the second day in a row.
- Traders are challenging the Fed's dovish stance, casting doubts over its forecasts of three rate cuts for this year.
- The US Dollar Index snaps firmly above 104.00 and breaks substantial support levels.
The US Dollar (USD) is basking in the glory of re-founded belief from traders. Whereas last year markets were challenging the US Federal Reserve (Fed) by pricing in more rate cuts than what the dot plot suggested, investors are now defying the US central bank in the other direction. Markets are expanding their positions in the Greenback with the idea that the Fed will not cut interest rates three times as it projected on Wednesday, but at most two, as economic data signals the US economy is still growing at a healthy pace.
On the economic data front, there is no top data expected to be released this Friday. However, markets will head into the weekend with three US Federal Reserve speakers lined up. First and foremost will be the Fed Chairman Jerome Powell, who will deliver a speech at around 13:00 GMT.
Daily digest market movers: Fed should stop pleasing the markets
- US sanctions risk trickling down into China’s tech market, with a substantial sell-off in the sector and triggering a weaker Yuan against most G7 peers. Views that China is losing grip on its economic recovery is starting to spread among investors and hedge funds.
- Three Fed speakers are lined up for this Friday to close off the week:
- Fed Chairman Jerome Powell is expected to make remarks at 13:00 GMT.
- Fed’s Vice Chair for Supervision Michael Barr will speak around 16:00 GMT.
- Atlanta Fed President Raphael Bostic closes off the US calendar officially at 20:00 GMT with remarks.
- Equities are very mixed, with Chinese indexes falling more than 1% in the Shenzhen index while the Hang Seng is down over 2%. European equities have taken over the negative tone, though down by half of a percent. US equities have not decided yet what to do and are flat.
- According to the CME Group’s FedWatch Tool, expectations for the Fed’s May 1 meeting are at 91.0% for keeping the rate unchanged, while chances of a rate cut are at 9%.
- The benchmark 10-year US Treasury Note trades around 4.24%, the lower end of this week.
US Dollar Index Technical Analysis: pendulum swinging the other way
The US Dollar Index (DXY) must be thinking markets have gone crazy with their 180 degree shift after the Fed meeting. Markets were positioned for several and early interest-rate cuts back in December, but these aspirations have been tuned down quite a lot. The stand-off with the Fed could not be bigger: while Wednesday’s dot plots showed Fed officials are still expecting three rate cuts for this year, markets are pricing in only two cuts and very late in the year.
The DXY is heading for those highs of February, after a fresh high for March was posted this Friday morning. On the upside, 104.96 remains the first level in sight. Once above there, the peak at 104.97 from February comes into play ahead of the 105.00 region with 105.12 as the first resistance.
Support from the 200-day Simple Moving Average (SMA) at 103.71, the 100-day SMA at 103.52, and the 55-day SMA at 103.58 are getting a fresh chance to show their importance. The 103.00 big figure looks to remain unchallenged for now after the decline from the Fed meeting got turned around way before reaching it.
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.
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