US Dollar firms as geopolitical tension boosts safe-haven demand
- The US Dollar Index rises for the third session in a row.
- Geopolitical risks keep the Greenback in demand.
- Fed reiterates commitment to 2025 rate cuts, US yields slip but the Dollar still gains.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against a basket of currencies, is ticking higher on Friday, helped by a wave of geopolitical unease. Despite a retreat in Treasury yields and the Federal Reserve’s (Fed) reaffirmation of its cutting path for 2025, the Greenback gains modest ground. The index attempts to break out of the March low range for the third straight day.
Daily digest market movers: US Dollar holds gains despite lower yields, geopolitical jitters
- Fed rate expectations remain steady, with a strong likelihood that rates will stay unchanged in May and move lower by midyear.
- US 10-year yields retreat, now around 4.20%, moving closer to levels last seen in early March, as investors lean into bonds.
- Fed Governor Christopher Waller supports maintaining the current balance sheet reduction pace, reinforcing the central bank’s steady tightening stance.
- Despite softer yields, the US Dollar gains as investors weigh ongoing global risk events.
- Market participants eye geopolitical hotspots, including ongoing instability in the Middle East and Eastern Europe, which continue to support the Greenback.
Technical analysis: DXY eyes rebound despite bearish signals on moving averages
The US Dollar Index is showing early signs of recovery from its March lows, supported by defensive flows and stable Fed guidance. The Relative Strength Index (RSI) is gradually climbing, while the Moving Average Convergence Divergence (MACD) histogram shows easing downside momentum.
Immediate resistance stands near 104.20, followed by 104.80 and 105.20, while 103.40 serves as nearby support, ahead of 102.90. A bearish crossover between the 20-day and 100-day simple moving averages near 105.00 acts as a potential technical sell signal. However, with sentiment stabilizing, the index looks poised to recover further from its March base.
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.