US Dollar sees upward momentum stall on mixed Retail Sales
- DXY trades near 106.80 on Tuesday.
- Market focus shifts toward upcoming Fed decision on Wednesday.
- Retail Sales fail to boost US Dollar enthusiasm.
The US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, trades with gains around 106.80 on Tuesday, as upward momentum stalls following November’s Retail Sales release. Market focus remains on Wednesday’s decision on interest rates by the Federal Reserve (Fed), and a 25 bps cut is already priced in.
Daily digest market movers: US Dollar stuck as markets assess Retail Sales figures
- The two-day Federal Open Market Committee meeting begins on Tuesday as economic fundamentals suggest the Federal Reserve should not cut rates.
- November Retail Sales data slightly exceeded forecasts but failed to spark renewed US Dollar buying, traders weigh the marginal revisions and mixed underlying details.
- Monthly Retail Sales grew by 0.7%, beating the 0.5% estimate, while the previous print got revised up to 0.5% from 0.4%.
- Growth remains solid: The New York Fed’s Nowcast model tracks Q4 growth at 1.9% SAAR, while the Atlanta Fed GDPNow stands at 3.3%.
- Markets still anticipate a 25-basis-point rate cut on Wednesday, priced at over 95% probability, even as economic data challenge the need for immediate easing.
DXY technical outlook: Indicators improve, but upside momentum fades
US Dollar indicators recovered significant ground last week, yet the index lacks the strength to retest the 107.00–108.00 zone. On Monday, the index pulled back. Although it trades near 106.30 on Tuesday, the overall picture remains constructive if it can stay above its 20-day Simple Moving Average (SMA).
Persistent growth and upbeat US data may keep the Greenback supported, but caution is warranted until a decisive break above near-term resistance levels is seen.
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.