- The US Dollar holds on to gains after a rather boring PCE release.
- Tensions over the weekend are elevated with markets scrambling for Saturday with US set to impose tariffs on Mexico and Canada.
- The US Dollar Index (DXY) moves further away from 108.00 and resides near the fresh weekly high at 108.37.
The US Dollar Index (DXY), which tracks the performance of the US Dollar against six major currencies, currently trades at 108.25 at the time of writing after receiving quite a few tailwinds this Friday. The first tailwind comes from US President Donald Trump, who announced a first wave of tariffs on Mexico and Canada. The Trump administration will impose 25% tariffs on about $900 billion in goods from both Canada and Mexico, Bloomberg reports. The US President also threatened to impose 100% tariffs on BRICS nations if they try to replace the US Dollar with a new currency in international trade.
The second tailwind comes from the rate differential between the US and several other countries. For example, this Friday the German inflation release boosted rate cut bets for the European Central Bank (ECB). This drives a bigger wedge between US yields and European ones, fueling a stronger US Dollar.
Unfortunately, the recent release of the Personal Consumption Expenditure (PCE) data for December was unable to further widen that rate differential. With all element roughly in line of expectations, the PCE release turned into a non-event.
Daily digest market movers: PCE for ones said nothing
- Asian markets remain quiet this week due to the Lunar New Year, which started on Tuesday, with Chinese traders returning to the markets on February 5.
- Volatility and nervousness are expected at the opening trade on Monday if US President Trump finally unleashes 25% tariffs on Canada and Mexico.
- Trump reiterated on Thursday his threat of imposing 100% tariffs on BRICS nations if they try to replace the US Dollar (USD) with a new currency in international trade. Trump posted on TruthSocial: “We are going to require a commitment from these seemingly hostile countries that they will neither create a new BRICS currency, nor back any other currency to replace the mighty US Dollar or, they will face 100% tariff,” and continued “there is no chance that BRICS will replace the US Dollar in international trade, or anywhere else, and any country that tries should say hello to tariffs, and goodbye to America!”
- US Personal Consumption Expenditures (PCE) Price Index data for December has been released:
- Monthly headline PCE ticked up 0.2% from 0.1% in November, as expected.
- Monthly core PCE jumped to 0.3% from 0.1% the previous month, in line with estimates.
- At 14:45 GMT, the Chicago Purchasing Managers’ Index for January is due. The expectation is for an uptick to 40 from 36.9 in the prior reading, still in contraction.
- Despite the tariff threat, equities are positive with the US equity futures set for a positive open at the New York Opening Bell.
- The CME FedWatch tool projects an 82.0% chance for no change in the Fed’s policy rate for its next meeting on March 19.
- The US 10-year yield is trading around 4.520%, bouncing higher after hitting a fresh January low at 4.484% on Thursday.
US Dollar Index Technical Analysis: Holding breath
The US Dollar Index (DXY) will face a shaky weekend while markets remain closed for business until Monday morning in Asia. With tariffs imposed on Canada and Mexico as earliest as Saturday, traders will be unable to move positions until Asian markets open, which means volatility is set to surge. Once the European session kicks in,the dust will start to settle on whichever event takes place over the weekend, with the DXY expected to remain caught between 107.30 to the downside and 109.30 on the upside.
Once 108.00 level has been acquired, the next level to pare back earlier losses is 109.30 (July 14, 2022, high and rising trendline). Further up, the next upside level to hit before advancing further remains at 110.79 (September 7, 2022, high).
On the downside, the 55-day Simple Moving Average (SMA) at 107.67 and the October 3, 2023, high at 107.35 acts as a double support to the DXY price. For now, that looks to be holding, though the Relative Strength Index (RSI) still has some room for the downside. Hence, rather look for 106.52 or even 105.89 as better levels.
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.
(This story was corrected on January 31 at 13:15 GMT to say ‘The US 10-year yield is trading around 4.524%, bouncing higher after hitting a fresh January low at 4.484% on Thursday.’, not ‘ at 4.484% on xxx.’)
