The US Dollar (USD) is on a subdued tone as the last trading day of 2023 comes to a close. The US Dollar Index (DXY) is positioned at 101.30, shedding daily gains as dovish bets on the Federal Reserve (Fed) weigh heavily on the Greenback. Soft Chicago PMI figures for December also added pressure to the currency on a quiet Friday.
Fed’s Dovish Stance
The Federal Reserve’s dovish stance, welcoming cooling inflation figures, ruling out rate hikes in 2024, and forecasting 75 bps of easing recently drove demand out of the US Dollar to riskier assets. The market is anticipating a rate cut in March with an additional adjustment in May. The upcoming release of key labor market data next week will provide further insights for investors to make informed bets on future Fed decisions.
The Chicago PMI report for December, issued by the Institute for Supply Management of Chicago, recorded a figure of 46.9, falling short of the consensus of 51 and the previous figure of 55.8. This disappointing result added to the downward pressure on the US Dollar.
Yields on US bonds continue to struggle, holding near multi-month lows. The 2-year yield is recorded at 4.25%, while the 5-year and 10-year yields stand at 3.84% and 3.85% respectively. This low yield environment contributes to the subdued tone of the US Dollar.
The CME FedWatch Tool indicates a low probability for a rate hike in the upcoming January meeting, with just 15% odds for a cut. Market sentiment is leaning towards rate cuts in March and May 2024, further dampening the strength of the US Dollar.
The indicators on the DXY daily chart reflect a predominantly bearish sentiment. The index is considerably below its 20, 100, and 200-day Simple Moving Averages (SMAs), indicating the dominance of selling momentum in the broader market. The Relative Strength Index (RSI) is nearing oversold conditions, aligning with the overall bearish outlook. The Moving Average Convergence Divergence (MACD) shows rising red bars, signifying a slight surge in selling pressure. Despite the selling momentum, the oversold RSI and rising MACD red bars may indicate a minor upward momentum.
Support levels for the DXY are identified at 100.70, 100.50, and 100.30. Conversely, resistance levels are seen at 101.30, 101.50, and 101.70.
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed’s two mandates are to achieve price stability and foster full employment. Interest rates are its primary tool for achieving these goals.
Interest Rate Adjustments and US Dollar Strength
When inflation is above the Fed’s 2% target, it raises interest rates to curb rising prices. This attracts international investors to the US, strengthening the US Dollar. Conversely, when inflation falls below 2% or the Unemployment Rate is high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve 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, including members of the Board of Governors, the president of the Federal Reserve Bank of New York, and regional Reserve Bank presidents. In extreme situations, the Federal Reserve may resort to Quantitative Easing (QE), a non-standard policy measure used during crises or low inflation. QE involves the Fed printing more Dollars and using them to buy high-grade bonds, weakening the US Dollar. Quantitative tightening (QT) is the reverse process of QE, typically positive for the value of the US Dollar.
As the last trading day of 2023 comes to a close, the US Dollar remains on a subdued tone. Dovish bets on the Federal Reserve, disappointing Chicago PMI figures, and low yields on US bonds contribute to the weakened state of the Greenback. Technical analysis indicates a predominantly bearish sentiment, although there may be a minor upward momentum due to oversold conditions. Investors are eagerly awaiting key labor market data next week to inform their bets on future Fed decisions.
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