- The US Dollar pops while US officials touch ground in Russia on Ukraine ceasefire.
- Traders see US PPI softer and weekly Jobless Claims come in positive.
- The US Dollar Index pops above 104.00 after the PPI release.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, trades broadly flat on Thursday, above 104.00 at the time of writing. Markets await comments from US diplomats visiting Russia to convene over a ceasefire deal, which already bears the green light from Ukraine. Meanwhile US President Donald Trump threatened Europe with a 200% tariffs on all wines and champagnes coming from the region.
On the economic front, a bulk load of data has been released this Thursday at 12:30 GMT. Besides the weekly US Initial Jobless Claims, the US Producer Price Index (PPI) data for February came in. Markets anticipated another soft print in the producer’s inflation reading after the softer-than-expected US Consumer Price Index (CPI) released on Wednesday, which was the case for the PPI reading as well. .
Daily digest market movers: Wednesday’s moves explained
- Markets are seeing US yields surge to a five-day high at 4.33% after hitting 4.15% earlier this week. The move is fueled by an outflow of position from US bonds and into US equities. Yields are inversely correlated with US bond prices, so if US bond prices drop, US yields surge, supporting a stronger US Dollar.
- The weekly US Jobless Claims and US Producer Price Index (PPI) for February have been released:
- Initial Jobless Claims for the week ending March 7 came in at 220,00, below the 225,000 expected. The Continuing Jobless Claims fell to 1.870 million, below the estimate 1.900 million.
- The monthly headline Producer Price Index for February fell to 0.0%, substantially below the 0.3% estimate and the 0.4% from last month. The monthly core PPI contracted even by 0.1%, far below the 0.3% estimate.
- The yearly headline PPI fell to 3.2%, just below the consensus of 3.3%, and further down from the 3.5% seen last month. The yearly core PPI reading, excluding food and energy, came in at 3.4%, just below the 3.5% expectqtion and from 3.6%.
- Equities are dropping lower after the PPI headlines which were coming just after US President Trump mentioning a 200% tariff on European wines and champagnes.
- The CME Fedwatch Tool projects a 97.0% chance for no interest rate changes in the upcoming Fed meeting on March 19. The chances of a rate cut at the May 7 meeting stand at 28.1% and 76.9% at June’s meeting.
- The US 10-year yield trades around 4.34%, off its near five-month low of 4.10% printed on March 4 and at a five-day high.
US Dollar Index Technical Analysis: Difficult to read
The US Dollar Index (DXY) is getting some support from rising US yields after a softer US CPI report for February was released on Wednesday, opening the door for the Federal Reserve (Fed) to cut interest rates further in 2025. It all does sound contradictory, but those are the mechanics of how markets work, bringing tension with the Fed possibly cutting rates later this year while US yields are heading higher. Once the impact of US President Donald Trump’s tariffs on US inflation is clear, the direction for the US Dollar Index will become clear as well.
Upside risk is a rejection at 104.00 that could result in more downturn. If bulls can avoid that, look for a large sprint higher towards the 105.00 round level, with the 200-day Simple Moving Average (SMA) at 105.02. Once broken through that zone, a string of pivotal levels, such as 105.53 and 105.89, will present as caps.
On the downside, the 103.00 round level could be considered a bearish target in case US yields roll off again, with even 101.90 not unthinkable if markets further capitulate on their long-term US Dollar holdings.
US Dollar Index: Daily Chart
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.