US Dollar rises to new high, underpinned by rising Treasury yields
- US Dollar extended recovery to Wednesday, reaching 106.00, its highest level since early May.
- Rising US Treasury yields lent support to the US currency.
- Week's highlight remains June’s PCE inflation data due on Friday.
Wednesday’s session witnessed the US Dollar, as represented by the Dollar Index (DXY), climb to 106.00, a level last observed in early May.
The economic landscape in the US continues to portray resilience. A few signals of disinflation are noticeable, but it still holds on which makes the Federal Reserve (Fed) not fully embrace the easing cycle.
Daily digest market movers: US Dollar elevated by rising Treasury yields, eyes on PCE
- Wednesday's standout data was the New Home Sales for May, which demonstrated a decline of about 11.3% to 619K units from 698K units in the prior release and beneath the 640K expected.
- Simultaneously, US Treasury yields are rising, with the 2, 5 and 10-year rates reported at 4.74%, 4.33%, and 4.31%, respectively.
- Expectations of a potential Fed rate cut in September continue to be high, odds from CME Fedwatch Tool are 60% for 25 bps cut.
- Thursday holds the Gross Domestic Product (GDP) revision for Q1, which is anticipated to hold steady at 1.3%.
- Friday's significant event will still be the May Personal Consumption Expenditures (PCE) report, an inflation gauge favored by the Fed.
- Both headline and core PCE are projected to soften to 2.6% YoY, dropping from 2.7% and 2.8%, respectively, in April.
DXY technical analysis: Bullish momentum continues, index aims high
The technical outlook remains solidly optimistic with indicators firmly in the green. The Relative Strength Index (RSI) preserves a level above 50, while green bars are developing in the Moving Average Convergence Divergence (MACD), suggesting a gathering of strength among bulls. The progressive incline of these indicators demonstrating that the DXY may be preparing for additional upside.
Furthermore, the DXY Index maintains a standing position above the 20, 100 and 200-day Simple Moving Averages (SMAs), confirming a persistently positive outlook. With the Index reaching levels not seen since early May and with indicators showing a propensity for further increment, the DXY is oriented toward further gains. The 106.50 level is the next target for bulls.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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