US Dollar lost ground after fresh data, yields continue their slide
- US Retail Sales from December underperformed, weekly Initial Jobless Claims rose.
- Traders monitor President-elect Trump’s policies and potential tariff shifts, adding uncertainty to the global economic picture.
- Mixed data releases prompt investors to reassess near-term rate expectations, but the Greenback’s longer-range trajectory remains constructive.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, extended its correction around the 109.00 level on Thursday. This week’s subpar performance stems primarily from declining US Treasury yields, which undermined the Greenback’s appeal mainly due to soft data from December.
Daily digest market movers: USD remains soft after mid-tier data
- December Retail Sales underperformed slightly, rising just 0.4% instead of the anticipated 0.6%. Meanwhile, November’s result got revised from 0.7% to 0.8%.
- Weekly Initial Jobless Claims for mid-January came in at 217K, a marked increase relative to the prior revised 203K figure.
- Philadelphia Fed Manufacturing Survey surprised to the upside at 44.3, improving from the previous -16.4 (subsequently revised to -10.9), and well above the anticipated -5.0.
- NAHB Housing Market Index for January is projected at 45, slightly down from 46, signaling modest headwinds in the housing sector.
- Equity markets slipped on Thursday as traders locked in profits related to softer inflation plays from Wednesday.
- Fed expectations remain anchored by CME FedWatch Tool data, indicating a 97.3% likelihood of unchanged policy at this month’s meeting.
- Benchmark yields dipped with the 10-year Treasury note retreating to around 4.65%, down from its 4.80% peak on Tuesday.
DXY technical outlook: Brief respite but overall picture still leans bullish
The US Dollar Index remains under pressure below 109.00 after this week’s yield-driven retreat. Profit-taking has contributed to recent losses, but the longer-term outlook stays favorable as the DXY hovers near multi-year peaks.
Significantly, the 20-day Simple Moving Average (SMA) rejected deeper selling and stands as a robust support line for bullish traders. While near-term pullbacks are possible, especially if more US data surprises to the downside, the Greenback’s overarching uptrend could quickly reassert itself as markets weigh persistent inflation and the Fed’s gradual policy approach.
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.