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22 May 2024
US Dollar sees slight uptick ahead of May’s FOMC Minutes
- DXY Index trades with minor gains on Wednesday near 104.80.
- The market anticipates Fed will hold interest rates flat in June and July.
- FOMC minutes release will provide insights into the Fed's inflation outlook, as well as provide view of September rate adjustment expectations.
The US Dollar Index (DXY) is trading at 104.80, showing mild gains in Wednesday’s American session. The Greenback continues to exhibit resilience, brushing off the effects of the soft inflation data reported last week, backed by the cautious words of Federal Reserve (Fed) officials. The Federal Open Market Committee (FOMC) Minutes to be released later in the session will provide investors with more clues on the bank’s stance.
Overall, the US economy is witnessing consistent growth, evident from dwindling Fed easing expectations despite softening labor and inflation figures. The hawkish stance from Fed officials suggests rate cuts are unlikely in the near future, which is holding the USD afloat.
Daily digest market movers: DXY mildly up as investors await catalyst on FOMC Minutes
- Minutes from the Federal Reserve’s (Fed) late April to early May policy meeting are to be released on Wednesday at 18:00 GMT.
- CME FedWatch Tool indicates no expectation for a rate cut in June or July but a 37% chance of maintaining current policy in September.
- Minutes are expected to show that the bank requires more evidence of inflation cooling down, which might benefit the USD.
DXY technical analysis: DXY displays conflicting signals, hinting toward a possible impending shift.
The DXY's Relative Strength Index (RSI) remains flat, stationed in negative territory, suggesting the sellers might have already done the bulk of their work. In conjunction, the Moving Average Convergence Divergence (MACD) offers a flat red bar histogram, further confirming the near-term bearish sentiment.
Furthermore, the bears have gained ground recently, with the index now residing below the 20-day Simple Moving Averages (SMA). This indicates that selling pressure has mounted in the short term, though markets await stronger signs to confirm a strengthening bearish grip.
That being said, the Dollar Index remains above the critical 100 and 200-day SMAs, hinting that bulls still maintain a grip.
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.