Market Data 
- DXY Index is noting losses at the start of the week, declining toward 105.70.
- Resilient US economy, hawkish Fed are likely to keep pressure on yields, which may limit losses.
- Markets foresee a hold on interest rates for Wednesday’s Fed meeting.
The US Dollar Index (DXY) is declining on Monday and fell to 105.70. The Bank of Japan (BoJ)’s recent intervention led to a slight drop in the USD value. However, the Greenback’s rally is expected to continue, thanks to monetary policy divergence favoring the US Dollar and the anticipation of a hawkish hold from the forthcoming Federal Reserve (Fed) meeting.
The US economy remains resilient, and sticky inflation may keep the USD’s rally alive. The Fed is maintaining a hawkish stance, resisting market pressure for easing, and a June rate cut seems unlikely. Wednesday’s messaging will be key.
Daily digest market movers: DXY starts week with left foot, eyes on Fed’s decision
Fed is anticipated to adopt a hawkish approach, underscoring hefty growth, sustained inflation in US economy.
Unchanging interest rates together with robust US data may maintain upward trajectory of US Treasury bond yields.
Market expectations for subsequent Fed meetings are seen as a 10% likelihood of a rate cut in June, 35% in July, and less than 80% in September.
US Treasury bond yields are down, signifying a disfavorable environment for the US Dollar. Specifically, the 2-year yield stands at 4.97%, the 5-year yield at 4.65%, and the 10-year yield at 4.63%.
DXY technical analysis: DXY bulls struggle under pressure, yet retain control
The indicators on the daily chart reflect a mixed outlook for the DXY. The Relative Strength Index (RSI), despite having a negative slope, maintains a stance in positive territory, indicating resilience among buyers. However, this bullish momentum appears somewhat challenged as evidenced by the freshly formed red bar in the Moving Average Convergence Divergence (MACD), a bearing that typically presages a potential shift toward bearish territory.
Also, the DXY stays comfortably above the 20, 100 and 200-day Simple Moving Averages (SMAs), an indication that buyers still have the upper hand in the intermediate and longer terms. Despite the potential for short-term selling pressure, the narrative of the bulls continues to be supported by this SMA structure.
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.
