- The US Dollar tumbles, portrays a sea of red crosses against all major currencies.
- No focal data points on Monday, which means no catalysts for a turnaround.
- The US Dollar Index falls off its pedestal, finding support momentarily at 104.50.
The US Dollar (USD) tumbles lower this Monday after a surprise intervention from the People’s Bank of China (PBoC). The PBoC held a meeting in Beijing on FX markets and confirmed that it will prevent any “over-adjustment” risk in the Yuan. It fixed its Yuan at 7.2148 USD/CNY where 7.3391 USD/CNY was expected.
Although it will be a very calm Monday in terms of the calendar and no US Federal Reserve speakers scheduled, keep an eye on the US bond market. This Monday three different tenures are set to be auctioned. With plenty of supply to be issued in the markets, US yields might rise again. Remember that bonds are quoted in prices, while yields move inversely to that price. With more supply issued in the markets, prices can drop and yields rise, supporting a stronger US Dollar.
Daily digest: US Dollar two-faced
- Plenty of rumours in the FX markets abound on Monday on the possibility for the Japanese Central Bank (BoJ) to loosen its Yield Curve Control (YCC), which would see its bond yields soaring higher.
- The G20 meeting has not brought any significant headlines or breakthroughs, as most news outlets are focusing on the absence of Russia and China as a telling sign.
- The People’s Bank of China (PBoC) has issued again a strong peg for its Yuan against the US Dollar. Additionally, it held a meeting in Beijing to outline an FX strategy in order to avoid speculation on a weakening Yuan. The comments spooked speculators and saw the Yuan strengthening near 1% against the US Dollar.
- In the fallout of those earlier PBoC comments, meeting and fixing, the Greenback lost over 1% as well against the Australian Dollar (AUD/USD) and the Japanese Yen (USD/JPY).
- Equities are looking for direction with no real notable outliers to mention. The only element to mention are the US Nasdaq futures, which are up over 50% in pre-trading.
- The CME Group FedWatch Tool shows that markets are pricing in a 93% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September.
- The benchmark 10-year US Treasury bond yield trades at 4.28% and is steeping again. The same story looks to continue this week with the US Treasury issuing a lot more debt, which causes prices to drop and yields to soar.
US Dollar Index technical analysis: Soft landing
The Greenback is taking a firm step back after falling over 1% against the Yuan, Yen and Australian Dollar. The overall cross for the Greenback is blood red for all its G20 major peers. Nonetheless, the sell-off in the US Dollar Index is notable but remains contained and might ease once the US session opens this week.
The new high to watch is at 105.16, both the high from last Thursday and the six-month high. The US Dollar Index first needs to gain back its lost territory from this Monday and break above the peak of Thursday mentioned here before. From there, the next high is at 105.88, the high of 2023.
On the downside, the 104.50 level already provided support ahead of 104.44. That is the high of August 25th and should act as a pivotal level. Once that gives way, a substantial downturn could take place to 103.03, where the 200-day SMA comes into play for support.
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.