- The DXY is trading with a negative bias for the second consecutive day, although the decline appears limited.
- The Fed’s hawkish shift continues to support elevated US bond yields and favors USD bulls.
- Geopolitical risks and fears of a trade war could help limit the safe-haven dollar’s losses.
The US Dollar Index (DXY), which tracks the value of the dollar against a basket of currencies, fell for the second day in a row on Monday and retreated further from its highest level since November 2022 touched last week. The index maintains its negative bias during the first half of the European session and is currently around the 108.70-108.65 area, down 0.25% on the day, although the fundamental backdrop justifies caution for bears.
The US ISM Manufacturing PMI improved from 48.4 to 49.3 in December, signaling signs of economic resilience and growth potential amid optimism over US President-elect Donald Trump’s expansionary policies. This, in turn, validates the Federal Reserve’s (Fed) hawkish shift in December, signaling that it would slow the pace of interest rate cuts in 2025, continuing to support elevated US Treasury yields. In fact, the 10-year US government bond yield hit its highest point since May 2 and favors the USD bulls.
Aside from this, lingering geopolitical risks arising from the protracted war between Russia and Ukraine and tensions in the Middle East, along with concerns over Trump’s tariff plans, support the prospects for buying to emerge at lower levels around the Dollar. of safe haven. Therefore, any further decline in the USD could be seen as a buying opportunity and remain limited ahead of this week’s important US macroeconomic releases, including Friday’s Non-Farm Payrolls (NFP). Meanwhile, traders on Monday could take cues from the final US services PMI and factory orders data.
US Dollar FAQs
The United States 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 in circulation alongside local banknotes. According to 2022 data, it is the most traded currency in the world, with more than 88% of all global currency exchange operations, equivalent to an average of $6.6 trillion in daily transactions. After World War II, the USD took over from the pound sterling as the world’s reserve currency.
The single most important factor influencing the value of the US Dollar is monetary policy, which is determined by the Federal Reserve (Fed). The Fed has two mandates: achieve price stability (control inflation) and promote full employment. Your main tool to achieve these two objectives is to adjust interest rates. When prices rise too quickly and inflation exceeds the 2% target set by the Fed, the Fed raises rates, which favors the price of the dollar. When Inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which weighs on the Dollar.
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 into a clogged financial system. This is an unconventional policy measure used when credit has dried up because banks do not lend to each other (for fear of counterparty default). It is a last resort when a simple lowering of 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 of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, primarily from financial institutions. QE usually leads to a weakening of the US Dollar.
Quantitative tightening (QT) is the reverse process by which the Federal Reserve stops purchasing bonds from financial institutions and does not reinvest the principal of maturing portfolio securities in new purchases. It is usually positive for the US dollar.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
