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- The US dollar stabilizes on Friday as investors take profits after Thursday’s rally.
- Investors are allowing the dust to settle on the euro’s weak performance following the ECB’s moderate interest rate hike.
- The dollar index is above 105.00, although it faces some profit-taking heading into the weekend.
He US dollars (USD) After a very volatile afternoon on Thursday, the company gained on sales and weakened confidence in favor of the dollar. A modest interest rate hike by the European Central Bank prompted traders to sell euros on expectations the euro zone economy would collapse. Meanwhile, US retail sales and producer price index numbers signaled that the US economy appeared to be heading for a soft landing.
The dollar will have to trade on its own this Friday as early morning trades see some profit-taking for the weekend. The University of Michigan’s consumer sentiment release will determine whether the Dollar Index (DXY), which measures the dollar’s value against a basket of currencies, will close below or above 105.00. There is a chance that the DXY will close in the green for the ninth week in a row.
Daily Roundup: US Dollar Faces Profit-Taking Sentiment in Michigan
- At 13:15 GMT, markets will digest August’s industrial production data, which is expected to rise a marginal 0.1%, slowing significantly from the 1% increase seen in July.
- At 2:00 p.m. GMT, the Michigan Consumer Sentiment Index and 5-year consumer inflation expectations will be released. The preliminary consumer sentiment index for September is expected to rise to 69.1 from 69.5. No forecasts are available for the component of five-year inflation expectations, which stood at 3% at the end of August.
- Shares are trading higher overall, with major Asian and European indexes rising nearly 1%. U.S. stock futures are lagging slightly, all up 0.20%.
- CME Group’s FedWatch tool shows that markets are pricing in a 97% chance that the Federal Reserve will leave interest rates unchanged at its September meeting based on recent PPI and retail sales numbers.
- The yield on 10-year US government bonds is 4.30%, significantly higher than at the beginning of the week.
Dollar Index Technical Analysis: Solo
The dollar had a double jetpack on Thursday. One of the elements that gave the dollar a boost was the macroeconomic front, with solid US retail sales, lower jobless claims (both initial and ongoing), as well as PPI numbers confirming that the Fed is on the right track. The second jetpack came from the devaluation of the euro, which took a hit after a European Central Bank meeting where Lagarde refrained from answering a few simple questions, leaving traders lacking much faith or elements to support the euro.
The Dollar Index (DXY) has risen and reached a high of 105.41. This is just a breath away from the 2023 high at 105.88. If the DXY manages to close the week above this level, the dollar is expected to strengthen further in the medium term.
On the other hand, the 104.44 level observed on August 25 maintained support for the index on Monday and prevented another sell-off in the DXY… Should the rise that began on Tuesday reverse and 104.44 give way, it could there will be a significant recession down to 103.04. with the 200-day SMA coming into play as support.
Frequently asked questions about the US dollar
The US dollar (USD) is the official currency of the United States of America and the “de facto” currency of many other countries where it circulates alongside local banknotes. According to 2022 data, it is the most traded currency in the world, accounting for more than 88% of all global currency exchanges, representing an average daily transaction volume of $6.6 trillion.
After the Second World War, the USD replaced the pound sterling as the world reserve currency. For most of its history, the U.S. dollar was backed by gold until the 1971 Bretton Woods Agreement ended the gold standard.
The most important factor affecting the value of the US dollar is monetary policy, which is determined by the Federal Reserve (Fed). The Fed has two missions: achieve price stability (control inflation) and promote full employment. Your main tool for achieving these two goals is to adjust interest rates.
If prices rise too quickly and inflation exceeds the Fed’s 2% target, it raises interest rates, which boosts the price of the dollar. If inflation falls below 2% or the unemployment rate is too high, the Fed can cut interest rates, weighing on the dollar.
In extreme situations, the Federal Reserve can also print more dollars and conduct quantitative easing (QE). QE is the process by which the Fed significantly increases the flow of credit into an overburdened financial system.
This is an unconventional policy measure used when credit has dried up because banks are refusing to lend to each other (for fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the desired result. It was the Fed’s weapon of choice to combat the credit crunch during the Great Financial Crisis of 2008. The Fed prints more dollars and uses it to buy US government bonds, especially from financial institutions. QE usually leads to a weakening of the US dollar.
Quantitative tightening (QT) is the reverse process in which the Federal Reserve stops purchasing bonds from financial institutions and does not reinvest the principal of maturing bonds in its portfolio into new purchases. It is usually positive for the US dollar.
