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23 Dec 2024
US Dollar edges higher as data revisions boost sentiment
- Durable Goods revision and higher US Treasury yields propel Greenback which stands near two-year highs.
- Consumer Confidence dipped but the Dollar holds gains.
- Shutdown threat keeps investors cautious which might limit the upside.
The US Dollar Index, which measures the value of the USD against a basket of currencies, is off to a positive start on Monday after a sluggish morning session. Upward revisions from the preliminary November Durable Goods release are fueling a stronger Greenback, pushing the index near 107.90, just shy of its two-year high above 108.00.
Daily digest market movers: US Dollar continues rising ahead of Christmas
- Government shutdown risks grow as lawmakers fail to pass a stopgap bill. Though a short shutdown may have limited market impact, investors remain on alert for last-minute deals.
- Longer-term yields climb further, with 10-year Treasury rates nearing 4.60% and 30-year yields hitting 4.77%. The short end lags, steepening the yield curve.
- On the data front, the Chicago Fed National Activity Index from November improved to -0.12 from -0.40, hinting at a less negative overall economic picture.
- November Durable Goods preliminary data showed a -1.1% print, but the prior figure was revised up from 0.3% to 0.8%, boosting the USD. Excluding transportation, orders dipped 0.1%.
- Consumer Confidence for December fell to 104.7 from 111.7, partially offset by an upward revision for November to 112.8. Despite the decline, the Dollar remains bid into year’s end.
DXY technical outlook: Indicators eye overbought territory
The Dollar Index has regained upward traction, with technical indicators pointing to renewed momentum. As the DXY inches closer to its two-year high, oscillators suggest the index is moving toward overbought levels. Nonetheless, the broader bullish bias remains intact as long as the price holds above the key support of 106.00. A sustained break above the latest peak could open the door to further gains, though thin holiday liquidity may lead to choppy price action in the near term.
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.