US Dollar has regathered its strength mid-week amid risk aversion.
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- US Dollar has regathered its strength mid-week amid risk aversion.
- US Dollar Index reached its highest level in over two months above 104.50 on Wednesday.
- US debt-limit bill advanced to House floor for a debate and a vote.
The US Dollar (USD) has started to gather strength against its major rivals mid-week amid a negative shift witnessed in risk perception following Tuesday’s uninspiring performance. The US Dollar Index, which tracks the USD’s valuation against a basket of six major currencies, turned north early Wednesday and reached its highest level since mid-March above 104.50.
The USD’s performance is likely to continue to be impacted by risk perception in the second half of the day with investors keeping a close eye on headlines surrounding the debt-limit bill.
On Tuesday, the House Rules Committee advanced the debt-ceiling bill to the House by an uncomfortably close vote of 7 to 6, causing investors to adopt a cautious stance. Several Republican lawmakers voiced their oppositions against the bill, which will be debated in the House floor and voted on Wednesday before moving to a final Senate vote.
The US Dollar Index (DXY) managed to close above the key technical level of 104.00 (Fibonacci 23.6% retracement of the November-February downtrend) on Tuesday, reflecting buyers’ willingness to defend that support. In case the DXY starts using 104.50 (static level) as support, it could target 105.00 (psychological level, static level) and 105.60 (200-day SMA, Fibonacci 38.2% retracement) next.
On the downside, 104.00 stays intact as key support. A daily close below that level could attract USD sellers and open the door for an extended slide toward 103.00, where the 100-day Simple Moving Average (SMA) is located.
It’s also worth noting that the Relative Strength Index (RSI) indicator on the daily chart stays near 70, suggesting that the DXY could correct lower in the short term before the next leg higher.
The US Federal Reserve (Fed) has two mandates: maximum employment and price stability. The Fed uses interest rates as the primary tool to reach its goals but has to find the right balance. If the Fed is concerned about inflation, it tightens its policy by raising the interest rate to increase the cost of borrowing and encourage saving. In that scenario, the US Dollar (USD) is likely to gain value due to decreasing money supply. On the other hand, the Fed could decide to loosen its policy via rate cuts if it’s concerned about a rising unemployment rate due to a slowdown in economic activity. Lower interest rates are likely to lead to a growth in investment and allow companies to hire more people. In that case, the USD is expected to lose value.
The Fed also uses quantitative tightening (QT) or quantitative easing (QE) to adjust the size of its balance sheet and steer the economy in the desired direction. QE refers to the Fed buying assets, such as government bonds, in the open market to spur growth and QT is exactly the opposite. QE is widely seen as a USD-negative central bank policy action and vice versa.
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