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U.S. dollar index analysis: under pressure near 107.00 ahead of Federal Open Market Committee meeting

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federal reserve board trade-weighted US dollar index
  • The index is under some selling pressure near 107.00.
  • U.S. yields are trying to rebound ahead of the Fed meeting.
  • The Federal Reserve is expected to raise rates by 75 bps later Wednesday.

The Federal Reserve Board trade-weighted U.S. dollar index is on the agenda today. The dollar index (DXY), which measures the dollar against a few of its major peers, came under weak downward pressure Wednesday and is testing the 107.00 area.

U.S. dollar index analysis: The Fed is waiting for the U.S. dollar index

What is the US dollar index and what effect does it have on the financial markets? The index is now giving up some of the strong gains of Tuesday and is fluctuating around 107.00, amid caution ahead of the FOMC meeting later in the New York session.

The Fed is expected to raise its target range for the federal funds rate by 75 bps to 2.25%-2.50%, although investors will be watching closely the follow-up press conference by Fed Chairman Powell for further details on rate changes in the coming months.

In addition to the Fed meeting, the NA session will include data on durable goods orders, MAB mortgage applications, and the trade balance of goods at an advanced stage.

What to watch out for

After hitting near 20-year highs north of 109.00 in mid-July, the index has been under downward pressure, though for now it seems to have met decent support around 106.00.

For now, the dollar remains buoyed by the Fed’s divergence from most B10 central banks (especially the ECB), coupled with bouts of geopolitical activity and renewed risk aversion among investors.

On the other hand, market talk of a potential US recession could temporarily undermine the dollar’s upward trajectory somewhat. The US fed trade weighted real broad dollar index plays an important role in the world economy. 

Key events in the U.S. this week: MBA. Mortgage applications, durable goods orders, trade balance, pending home sales. Fed interest rate decision. Powell press conference (Wednesday) – preliminary Q2 GDP, initial filings (Thursday) – PCEprice index, personal income, personal spending, final Michigan consumer sentiment index (Friday).

Current issues in the background: Hard/soft/soft? landing of the U.S. economy. Escalating geopolitical tensions in Russia and China. A more aggressive Fed rate hike this year and 2023. Trade conflict between the U.S. and China. The future of Biden’s “Build Back Better” plan.

Current levels for the U.S. Dollar Index

The index is now down 0.20% to 106.98 and meets initial support at 106.11 (weekly low of July 22), then 103.67 (weekly low of June 27) and finally 103.41 (weekly low of June 16). On the other hand, a break above 109.29 (2022 high on July 15) would lead to 109.77 (monthly high of September 2002) and then 110.00 (round level).

Careful US dollar index analysis should be performed before deciding on a new trade. 


Dollar hands back gains after Israeli strike; weekly gains likely

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on – The U.S. dollar handed back early gains Wednesday in volatile action, as traders digested the reported Israeli strikes against Iranian sites and the impact on risk appetite.

At 05:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 105.870, having earlier climbed as high as 106.190, just marginally below the five-month peak of 106.51 seen earlier in the week. 

Dollar hands back gains after Israeli strikes

The safe-haven dollar jumped higher earlier Friday following reports that Israel attacked Iran in an escalation of conflict in the Middle East, just a few days after Iran launched a drone strike on Israel.

This move marks a potential escalation in the Iran-Israel conflict, and could herald worsening geopolitical conditions in the Middle East, especially after initial reports showed strikes near locations holding Iranian nuclear facilities.

However, these gains have since dissipated after Iranian news agencies said there was no damage to the facilities, and the strikes have been seen to be rather limited in size. 

That said, the dollar is still likely to post a positive week as strong U.S. economic data and persistent inflation have prompted investors to drastically rethink the chances of the Federal Reserve cutting rates any time soon. 

A slew of hawkish comments from Fed officials have also helped the greenback, as evidenced by Atlanta Federal Reserve Bank President on Thursday saying that if inflation does not continue to move toward the U.S. central bank’s 2% goal, central bankers would need to consider an interest-rate hike.     

Sterling edges higher despite weak UK retail sales

In Europe, rose 0.1% to 1.0648, after fell less than expected in March, decreasing by 2.9% on the year, compared with a forecast 3.2% decline.

Additionally, Reuters reported the German government will raise its growth forecast for the German economy this year to 0.3%, from a previous forecast of 0.2%.

However, any euro strength may well be temporary with the now expected to cut interest rates before the Federal Reserve in an attempt to give the region’s struggling economies a boost.

climbed 0.1% higher to 1.2445, trading just above five-month lows despite British stagnating in March.

Sales volumes showed no growth last month, below the expected 0.3% increase, representing the first time that they have not grown in monthly terms since December.

Weakness in retail spending makes it more likely the will start cutting interest rates in the summer, probably before the Federal Reserve.

Yen boosted by safe-haven status

In Asia, traded 0.1% lower at 154.47, with the safe-haven yen boosted by the elevated tensions in the Middle East. 

The Japanese currency remained near 34-year lows, prompting caution over possible government intervention.

edged 0.1% higher to 7.2417, with the yuan near five-month highs amid uncertainty over the Chinese economy.

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Japan’s finance minister gives fresh warning on excessive yen moves

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WASHINGTON (Reuters) – Japanese Finance Minister Shunichi Suzuki said on Friday authorities would take appropriate action against excessive currency market moves, repeating his warning to investors against pushing down the yen too much.

There has been growing market interest in the timing and pace of a pivot by the U.S. and European central banks toward less restrictive monetary policy, Suzuki said.

“Uncertainty and market speculation over these developments have heightened volatility in financial markets, including foreign exchange markets,” Suzuki said in a statement to the International Monetary Fund’s steering committee.

“It is important that foreign exchange rates move stably, reflecting fundamentals, and excessive volatility is not desirable. We would take appropriate actions against excessive movements,” he said during the spring meetings of the International Monetary Fund and World Bank in Washington.

© Reuters. FILE PHOTO: Japanese Finance Minister Shunichi Suzuki speaks during an event about expanding health coverage for all during the IMF and World Bank’s 2024 annual Spring Meetings in Washington, U.S., April 18, 2024. REUTERS/Ken Cedeno/File Photo

A broad dollar rally driven by receding market expectations of a near-term U.S. interest rate cut has recently pushed the yen to a 34-year low, heightening the chance of currency intervention by Japanese authorities.

The U.S., Japan and South Korea agreed to “consult closely” on foreign exchange markets in their first trilateral finance dialogue on Wednesday, acknowledging concerns from Tokyo and Seoul over their currencies’ recent sharp declines.

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BofA lowers EURUSD year-end forecast to 1.12 amid Fed policy shift

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On Friday, Bank of America (BofA) revised its forecast for the currency pair, now expecting it to reach 1.12 by the end of the year, down from the previously anticipated 1.15.

The adjustment follows a change in the Federal Reserve’s interest rate policy, with the first cut now expected in December rather than June. BofA cited potential risks from the absence of Fed cuts and fluctuating oil prices.

The firm also highlighted the impact of escalating geopolitical tensions, rising oil prices, and persistently high U.S. interest rates on emerging markets (EM). These factors have been identified as significant challenges, prompting BofA to revise its forecasts for the exchange rate as well.

The bank now predicts the USD/JPY will climb to 155 by the end of 2024 and 147 by the end of 2025, which is an upward revision based on the latest Federal Reserve forecast adjustments.

BofA has also shifted its stance on the USD/JPY from a slightly short position to buying, indicating a change in their trading strategy. The firm noted that most of their positions are light, suggesting a cautious approach to currency trading at the moment.

In the broader context of currency market dynamics, BofA stated that a stronger U.S. dollar would likely depend more on real money movements rather than speculative trades. This perspective takes into account the actual flow of funds by institutional investors as opposed to short-term bets made by traders.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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