- The Dollar Index remains under heavy pressure, slipping below 108.00 and testing the critical 107.00 level.
- Chicago Fed National Activity Index for December jumps to 0.15 from a revised -0.01, signaling unexpected economic strength.
- New Home Sales in December beat estimates, rising to 698,000 units versus expectations of 670,000.
- President Trump’s tariff threats on Colombia imports and Wednesday’s Federal Reserve decision add uncertainty to the Dollar’s trajectory.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against a basket of currencies, continues to slide on Monday, breaking below the psychological 108.00 mark. Concerns over AI-related market valuation, combined with geopolitical tensions from President Donald Trump’s tariff threats against Colombia, contribute to bearish sentiment. Economic data highlights some resilience in the United States (US) economy, but the Dollar remains under pressure ahead of the Federal Reserve’s (Fed) Wednesday decision on interest rates.
Daily digest market movers: US Dollar under pressure amid Fed anticipation and geopolitical tensions
- The Chicago Fed National Activity Index for December rebounded to 0.15 from -0.01 in November, reflecting stronger economic activity.
- December New Home Sales surged to 698,000 units, surpassing the forecast of 670,000 and November’s 674,000 figure.
- President Trump’s proposal to impose 50% tariffs on Colombian imports over deportation disputes rattles trade markets and global sentiment.
- Markets will look for further clues on the incoming president’s plans on tariffs on its North American neighbors.
- Federal Reserve’s Wednesday meeting looms large; markets are watching closely for updates on rate decisions and economic outlook with a hold priced in.
- Both the statement and Chair Jerome Powell’s tone will be closely looked upon by the markets.
DXY technical outlook: Bearish momentum builds further
The US Dollar Index remains below 108.00, showing persistent downward momentum. The Relative Strength Index (RSI) continues to linger under the neutral 50 mark, indicating weak relative strength. Meanwhile, the Moving Average Convergence Divergence (MACD) histogram deepens in the red, signaling intensifying bearish pressure. Although the index is testing oversold conditions, the downside risks remain, with the potential to breach 107.00. A corrective bounce could occur if the movement becomes overstretched, but recovery beyond 108.50 appears challenging unless sentiment shifts significantly. For now, the path of least resistance points further downward.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
