Dollar Rebounds on German Stimulus
- The US Dollar is bouncing back, shaking off earlier weakness and climbing away from a fresh five-month low on the US Dollar Index.
- Market participants are buzzing about potential increased spending in Germany, possibly reaching a significant 0.5 trillion Euro.
- As news breaks of discussions between Putin and Trump, the US Dollar Index finds its footing and recovers from previous dips.
The US Dollar Index (DXY), a key measure of the US Dollar’s (USD) strength against six major currencies, is currently holding steady at 103.60 as of Tuesday. This comes as United States (US) President Donald Trump and Russian President Vladimir Putin engage in talks, a development that follows a flurry of news headlines that have heightened geopolitical uncertainty and unfolded alongside significant events throughout the day. Market watchers are on edge because any major headline has the power to tip the DXY towards a deeper six-month low, potentially breaching the 103.00 mark.
Right now, all eyes are on the ongoing, high-stakes discussion between US President Donald Trump and Russian President Vladimir Putin. Rumors suggest they are discussing territorial matters and the division of assets in Ukraine. This has sparked worries about the future of Ukraine, with concerns growing that the nation could be further divided. Such a scenario could also lead to increased defense spending from the European Union (EU) and the North Atlantic Treaty Organisation (NATO) as they seek to reinforce their security.
In a separate development, the fragile ceasefire truce between Israel and Gaza, which had been in place since January, was broken this morning. Israel launched attacks targeting Hamas’ tactical sites and buildings, citing Hamas’s failure to release hostages as the reason for the military action, a claim previously made by both Israel and the US. This renewed conflict raises the possibility of further attacks in the Red Sea by Houthi rebels and retaliatory actions from Hamas.
Daily market digest: Key headlines impacting trading
- Several important economic figures have already been released today:
- Building Permits for the month showed a figure of 1.456 million, exceeding the anticipated 1.45 million for February, although slightly lower than January’s 1.473 million.
- Housing Starts in February came in strong at 1.501 million units, surpassing expectations of 1.38 million and showing an increase from January’s 1.366 million.
- The Export Price Index for the month edged up by 0.1%, surprising predictions of a 0.2% contraction in February, and following a robust 1.3% gain in January. Similarly, the Import Price Index jumped by 0.4%, also beating forecasts of a 0.1% decrease and improving upon January’s 0.3% increase.
- At 13:15 GMT, the latest Industrial Production data for February was released. It showed a significant increase of 0.7%, comfortably beating the consensus forecast of 0.2% and exceeding January’s 0.5% growth.
- The stock market is showing mixed signals again on Tuesday. European indices are enjoying gains of nearly 1%, fueled by optimism surrounding the potential approval of Germany’s spending budget. However, US equities are experiencing a downturn, falling by almost 1% in what’s clearly a day of divergent trading trends.
- According to the CME Fedwatch Tool, there’s a very strong 99.0% expectation that the Federal Reserve will hold interest rates steady at the upcoming meeting on Wednesday. Looking further ahead to the May meeting, the probability of a rate cut is currently assessed at 21.5%.
- The US 10-year Treasury yield is currently trading around 4.30%, moving away from its recent near five-month low of 4.10% reached on March 4th.
US Dollar Index Technical Analysis: Expecting Volatility
The US Dollar Index (DXY) is currently hovering around the edge of its recent trading range, between 103.18 and 103.99, on Tuesday, as selling pressure intensifies. Factors like recent weaker-than-expected US economic data and geopolitical developments that could favor the Eurozone – such as the potential approval of increased spending in Germany and the Trump-Putin discussions regarding a possible ceasefire in Ukraine – suggest that another move lower for the DXY is definitely on the cards.
However, if market sentiment shifts and current events are perceived as a ‘sell the rumor, buy the fact’ scenario, we could see a surprise rally initially, potentially pushing the DXY back towards 104.00. If buyers can defend against a technical rejection at that level, we could witness a stronger surge towards the 105.00 level. Notably, the 200-day Simple Moving Average (SMA) is converging around this point, strengthening it as a significant resistance area. If this zone is decisively broken, we could then see a series of key levels, such as 105.53 and 105.89, acting as potential ceilings.
On the downside, the 103.00 level is a clear bearish target should US yields resume their decline. Looking further down, a move towards 101.90 isn’t out of the question if markets continue to reduce their long-term holdings of the US Dollar.
US Dollar Index: Daily Chart
Banking crisis FAQs
The Banking Crisis of March 2023 unfolded when three US banks, heavily invested in the tech and crypto sectors, faced a sudden surge in withdrawals. This exposed significant vulnerabilities in their financial health, ultimately leading to their collapse. Silicon Valley Bank (SVB), based in California, became the most prominent example. It experienced a massive increase in withdrawal requests as customers grew concerned about the wider fallout from the FTX collapse, and as they sought higher returns available elsewhere.
To meet these redemption demands, Silicon Valley Bank was forced to sell its substantial holdings of US Treasury bonds. However, due to rapid interest rate hikes by the Federal Reserve, the value of these Treasury bonds had significantly decreased. The announcement that SVB had incurred a substantial $1.8 billion loss from these bond sales triggered widespread panic, leading to a full-blown bank run that ultimately required intervention from the Federal Deposit Insurance Corporation (FDIC). The crisis then spread to San Francisco-based First Republic, which was eventually rescued through a coordinated effort involving major US banks. On March 19th, Credit Suisse in Switzerland also succumbed to the turmoil after years of poor performance and was acquired by UBS.
The Banking Crisis had a negative impact on the US Dollar (USD) because it significantly altered expectations regarding future interest rate policy. Before the crisis, investors had largely anticipated the Federal Reserve (Fed) would continue raising interest rates to combat persistent high inflation. However, once the crisis revealed the immense pressure this policy was placing on the banking sector by devaluing their US Treasury bond holdings, the expectation shifted towards the Fed pausing or even reversing its rate-hiking trajectory. Since higher interest rates generally support the US Dollar, the currency weakened as the market priced in the potential for a policy shift.
Conversely, the Banking Crisis proved to be a bullish catalyst for Gold. Firstly, Gold benefited from increased demand due to its traditional role as a safe-haven asset during times of economic uncertainty. Secondly, the crisis led investors to anticipate a pause in the Federal Reserve’s aggressive rate-hiking policy, driven by concerns about the impact on the financial stability of the banking system. Lower interest rate expectations reduce the opportunity cost of holding Gold, making it more attractive. Thirdly, Gold, which is priced in US Dollars (XAU/USD), saw its value increase as the US Dollar itself weakened.
