- The US Dollar sinks lower on Monday after market sentiment improved as European leaders will to guarantee a peace deal in Ukraine.
- Traders zoom in on US manufacturing data on Monday with the ISM and S&P Global PMI release.
- The US Dollar Index (DXY) erases Friday’s gains and dives lower.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, breaks below 107.00 at the time of writing on Monday. Market mood improved after European leaders, including Ukrainian President Volodymyr Zelenskyy, showed a willingness to guarantee a peace deal in Ukraine on Sunday. The plan now needs to be backed by the United States (US).
On the economic data front, the focus will be on the manufacturing sector in the United States. In addition to the S&P Global Purchase Managers Index (PMI) final reading for February, the Institute for Supply Management (ISM) will release its specific manufacturing PMI report. Besides the headline gauge, the Prices Paid and New Orders components could give some insight into inflation and how order books look in the sector after just over a month of US President Trump’s influence.
Daily digest market movers: No changes with data
- At 14:45 GMT, S&P Global releases its Manufacturing PMI final reading for February. Expectations are for a steady 51.6 from the preliminary reading.
- At 15:00 GMT, the ISM will release its report on the Manufacturing sector for February.
- The headline PMI is expected to come in at 50.5 compared to 50.9 in January.
- The Prices Paid subindex is expected to come in at 56.2, coming from 54.9 in January.
- The New Orders component does not have a forecast available and stood at 55.1 in the January reading.
- Equities are in a good mood and are mildly positive at the start of this week.
- The CME Fedwatch Tool projects a 25.4% chance that interest rates will remain at the current range of 4.25%-4.50% in June, with the rest showing a possible rate cut.
- The US 10-year yield trades around 4.25%, further down from last week’s high of 4.574%.
US Dollar Index Technical Analysis: New orders
This week could not start with more uncertainty, with many moving parts and ties still loose since Friday’s burst out at the Oval Office. It becomes relatively clear that US data will be seen as being on auto-pilot, while geopolitics will be the main drivers going deeper into 2025. Traders will need to embrace the new regime where one headline could easily snap a nice continuum or trend in any asset, as well as for the US Dollar Index.
On the upside, the 55-day Simple Moving Average (SMA) is the first resistance to watch for any rejection, currently at 107.98. In case the DXY can break above the 108.00 round level, 108.50 is coming back in scope.
On the downside, the 107.00 round level needs to hold as support. Nearby, 106.84 (100-day SMA) and 106.52, as a pivotal level, should act as support and avoid any returns to the lower 106-region.
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.
