US Dollar retreats for third consecutive day after Japan warns markets over devalued Yen
- The US Dollar extends its decline on Tuesday with US markets coming out of a long weekend.
- All eyes are on Fed speakers and chunky Treasury issuances across the curve.
- The US Dollar Index eases further below 104.50 and starts to look bleak.
The US Dollar (USD) extends its recent decline on Tuesday while US markets come back again after a long weekend due to the Memorial Day bank holiday on Monday. The Greenback eases as a risk-on sentiment sets the scene for the beginning of the week, topped up with comments from Japanese Finance Minister Shun’ichi Suzuki. Suzuki warned against speculators that are propping up for more Japanese Yen devaluation by saying that Japan is ready to take more, bigger and firmer steps in order to have a stable exchange rate, Bloomberg reported.
On the economic data front, the US Treasury will auction four bond issuances in several maturities across the yield curve, and three US Federal Reserve (Fed) speakers are set to make comments on Tuesday.
Daily digest market movers: Housing and Manufacturing sings on the wall
- At 12:55 GMT, the weekly Redbook Index for the week ending on May 24 is set to be released. The previous week’s result came in at 5.5%.
- The March Housing Price Index will be released at 13:00 GMT. February's reading was 1.2%, and a decline to 0.5% is expected. Should the Index fall into contraction, substantial US Dollar easing could materialize.
- At 14:00 GMT, May’s Conference Board Consumer Confidence will be released, with the previous number at 97.0 and 96.0 forecasted.
- At 14:30 GMT, the Dallas Fed will release its Manufacturing Business Index for May. April’s data showed a contraction to -14.5, with an improvement to -12.5 forecasted for May.
- The US Treasury is having four bond auctions on Tuesday:
- At 15:30 GMT, both a 3-month and a 6-month bill are to be allocated.
- At 17:00 GMT, a 2-year and a 5-year note are to be issued.
- Three Fed speakers are lined up on Tuesday:
- Federal Reserve Governor Michelle Bowman already issued comments on Tuesday morning during Asian hours. She iterated it continues to remain important that the Fed sticks to reducing its balance sheet.
- Federal Reserve Bank of Minneapolis President Neel Kashkari will speak at 13:55 GMT in a panel at the Barclays-CEPR International Monetary Policy Forum.
- Around 17:00 GMT, Federal Reserve Bank of San Francisco President Mary Daly participates in a panel discussion about Artificial Intelligence (AI) and the Economy at the Federal Reserve Bank of San Francisco, together with Federal Reserve Governor Lisa Cook.
- Chinese equity markets were under pressure on Tuesday after their rally on Monday. European equities are up a quarter of a percent during European trading hours. US equity futures are also trading in the green ahead of the opening bell.
- The CME Fedwatch Tool is pricing 99.1% for no change in the policy rate for June. September futures are in a stalemate, where it is a neck-and-neck race with 48.4% chances for keeping rates unchanged against 46.4% chances for a 25 basis points (bps) rate cut and 4.7% chances for even 50 bps rate cut. A marginal 0.4% price in an interest rate hike.
- The benchmark 10-year US Treasury Note trades around 4.45% in a tight range ahead of the US opening bell.
US Dollar Index Technical Analysis: Testing vital support
The US Dollar Index (DXY) is playing a dangerous game on Tuesday, testing important support levels and retreating for a third day in a row. Ahead of the US opening bell, the DXY is testing the 200-day Simple Moving Average (SMA) at 104.41. With the 100-day SMA very close, at 104.32, much room opens up for a nosedive should markets start to unwind their Dollar long positions.
On the upside, the DXY index needs to reclaim key levels it lost last week: the 55-day Simple Moving Average (SMA) at 104.88 and the 105.00 big round level. Further up, the following levels to consider are 105.12 and 105.52.
On the downside, the 200-day SMA at 104.41 and the 100-day SMA around 104.32 are the last line of defence. Once that level snaps, an air pocket is placed between 104.30 and 103.00. Should the US Dollar decline persist, the low of March at 102.35 and the low from December at 100.62 are levels to consider.
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.