- The US Dollar trades flat after Ukraine and Russian delegates ended meeting in Turkey without any resolution.
- Traders look ahead to the preliminary May reading for the University of Michigan Consumer Sentiment reading.
- The US Dollar Index trades below 101.00, trying to find a floor.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, is trading flat around 100.80. The DXY is for now able to avoid a weekly loss while market participants are starting to raise questions over the stability of the Greenback. With United States (US) President Donald Trump flip-flopping on its tariff approach and how ill-conceived the first trade deals are, traders are starting to challenge the viability of the grand scheme from the Trump administration and its meaning towards the Greenback.
The US Dollar retreated on Thursday after a slew of economic data pointed that price pressures and consumer spending are cooling. The Producer Price Index (PPI) data unexpectedly showed prices fell in April compared with the previous month, while Retail Sales grew by a marginal 0.1% after March’s 1.5% surge.
On the geopolitical front, talks in Turkey about the Russia-Ukraine war failed to produce any significant outcome. Ukrainian President Volodymyr Zelenskyy met with Turkish President Recep Tayyip Erdoğan in Ankara, but soon left as Russian President Vladimir Putin did not come to the talks. US President Trump said a deal between the two nations will not be possible if Trump does not meet with Putin himself. Meanwhile, demand for more and harsher sanctions on Russia is starting to build, in order to force Russian President Putin to come to the negotiating table.
Daily digest market movers: Talks did not deliver
- Both Ukraine and Russian delegations entered in talks in Istanbul, but did not deliver any fruitful outcome with talks being concluded this Friday, Bloomberg reports.
- The US economic calendar meanwhile saw some data come out:
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- April’s monthly Housing Starts fell to 1.361 million, coming from 1.37 million in March.
- April’s Import-Export Price Indexes came out as well. Export prices came in at 0.1% from 0.1% previously where -0.5% was expected. Import prices came in higher at 0.1%, missing the contraction of -0.4%, and up from the previous -0.4% contraction.
- At 14:00 GMT, the University of Michigan publishes its preliminary report for May:
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- The Consumer Sentiment Index is seen edging up slightly to 53.4 from 52.2 in April’s final reading.
- The 5-year inflation expectation is expected to remain stable at 4.4%.
- On equity markets, European indices soar on Friday, up just shy of 1%. US futures are lagging a touch but are also in the green, up by less than 0.50%.
- The CME FedWatch tool shows the chance of an interest rate cut by the Federal Reserve in June’s meeting at just 8.2%. Further ahead, the July 30 decision sees odds for rates being lower than current levels at 38.6%.
- The US 10-year yields trade around 4.39%, softening from its peak performance on early Thursday at 4.54%
US Dollar Index Technical Analysis: Holding its breath
The US Dollar Index could be on the verge of a crisis as an increasing number of financial market participants start to question the stability status of the Greenback, given the unstable policies of the Trump administration. The “Trump put” is becoming an actual theme, and in this scenario it isn’t likely that the US Dollar revisits levels such as 107.00 or 110.00 for a long time. Add in the fear of a joint Asian currency intervention, where local currencies are appreciated against the Greenback, and US exceptionalism might be over for an extended period of time.
On the upside, 101.90 is the first big resistance again. It already acted as a pivotal level throughout December 2023 and as a base for the inverted head-and-shoulders (H&S) formation during the summer of 2024. In case Dollar bulls push the DXY even higher, the 55-day Simple Moving Average (SMA) at 102.06 comes into play.
On the other hand, the previous resistance at 100.22 is now acting as firm support, followed by the year-to-date low of 97.91 and the pivotal level of 97.73. Further below, a relatively thin technical support comes in at 96.94 before looking at the lower levels of this new price range. These would be at 95.25 and 94.56, meaning fresh lows not seen since 2022.
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.