US Dollar stabilizes near key levels ahead of Trump inauguration, data releases and Fed signals
- President-elect Donald Trump is expected to unveil a range of executive directives designed to jumpstart fiscal measures, tariffs and stimulus actions.
- Robust housing figures, including rising permits and starts, suggest that the United States economy remains on solid footing into the new year.
- Markets assess fresh Fed officials’ clues.
The US Dollar consolidates further at current levels on Friday, with the US Dollar Index (DXY) holding around 109.00 and searching for direction. Markets are left clueless after Federal Reserve’s (Fed) Waller comments suggesting a March rate cut is still in the cards while markets assess fresh low-tier data ahead of Trump’s inauguration.
Daily digest market movers: USD recovers some ground ahead of Trump’s inauguration, Fed’s signals
- Fed Governor Christopher Waller offered a more dovish tone, highlighting favorable inflation results that could warrant a rate reduction in the near term, mentioning that a rate cut in March remains a possibility if incoming data support further price moderation.
- Treasury Secretary nominee Scott Bessent emphasized the need to preserve the US Dollar’s global reserve currency status and defended the idea of an independent Federal Reserve, while also suggesting that any pass-through from tariffs to consumer prices might be partially offset by exchange rate shifts.
- On the data front, minor data including Building permits and housing starts surpassed many analysts’ expectations, while industrial output rebounded notably, underscoring ongoing US economic momentum.
- Equity markets remain buoyant, with US stocks gaining more than 1% intraday, potentially reflecting optimism about the new administration’s aggressive policy agenda.
- CME FedWatch Tool shows that markets have roughly priced in that rates will remain on hold at the upcoming policy meeting, as the central bank waits to interpret new data and evolving political factors.
DXY technical outlook: Rebounding from profit-taking, eyeing multi-year highs
After profit-taking briefly dragged the Greenback lower, the US Dollar Index managed to reclaim territory above 109.20. Despite intermittent selling, the DXY remains near multi-year peaks as fundamental indicators continue to support the Dollar’s uptrend. Significantly, the 20-day Simple Moving Average has repelled sellers, serving as a robust foothold for bulls.
While a short-term dip is plausible should new data or policy announcements disappoint, the prevailing technical structure implies that buyers may swiftly reemerge to defend the Dollar’s momentum.
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.