Monthly lows near 101.00 for United States Dollar Index in wake of Democratic sweep

US Dollar comes under pressure as Democrats sweep midterms and oil prices slide.
Fed rate hike expectations remain supported by robust ADP hiring and continued expansion in ISM services activity.
Ahead of crucial jobless claims and payroll figures, markets assign an 82% probability to a December rate hike.

Selling pressure has pushed the US Dollar Index (DXY) to a monthly low of 101.20 in Thursday’s Asian session, extending its decline to a second consecutive day. The index tracks the US Dollar (USD) against a basket of six major currencies.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

A Democratic sweep in the US midterm elections triggered heavy selling in the Greenback. With Democrats securing both houses of Congress, concerns grew over possible political gridlock in Washington. Further pressure on the currency came from a steep fall in oil prices, as markets anticipated a swift resolution to the Middle East conflict.

Resilient US economic readings could, however, lend support to the US Dollar by strengthening expectations of a Federal Reserve rate hike. According to the ADP employment report, private-sector employers added 86,000 jobs in October, exceeding the forecast of 69,000. September’s reading was nevertheless revised lower, from 90,000 to 86,000. The ISM Services PMI, meanwhile, eased from 54.9 to 54.5, marginally missing the 54.8 estimate while continuing to signal a firm expansion.

Nearly an 82% probability of a further rate hike in December is reflected in market pricing, according to the CME FedWatch Tool. Attention now turns to the next major economic releases: weekly US Initial Jobless Claims on Thursday, followed by Friday’s Nonfarm Payrolls (NFP) report.

Technical Analysis: Can the Dollar Index Reclaim Its Moving Averages?

A bearish near-term outlook persists on the daily chart, where Dollar Index Spot is trading at 101.20 below both its nine-period and 50-period Exponential Moving Averages (EMAs). Recent recovery attempts have been unable to regain these dynamic resistance levels. At roughly 43, the 14-day Relative Strength Index (RSI) is now below the neutral threshold of 50, suggesting that bullish momentum is weakening rather than signalling outright oversold conditions.

The first upside hurdle lies around 101.27, where the 50-period EMA strengthens resistance. Additional selling interest is expected near the nine-period EMA at 101.72. Only a daily close above the latter would relieve immediate downward pressure. Until that happens, the technical setup indicates that advances towards these averages are likely to meet selling, keeping the Dollar Index exposed to another decline as momentum stays muted.

Chart Analysis Dollar Index Spot — US Dollar Index: What Does the Daily Chart Show?

US Dollar: Key Questions Answered

What role does the US Dollar play?

As well as being the official currency of the United States of America, the US Dollar (USD) serves as the ‘de facto’ currency in a significant number of other countries, circulating alongside their local banknotes. No other currency is traded as heavily: data from 2022 show that it accounts for over 88% of worldwide foreign exchange turnover, equivalent to average daily transactions of $6.6 trillion. After the Second World War, the USD replaced the British Pound as the world’s reserve currency. Gold backed the US Dollar for most of its history, until the Gold Standard ended with the Bretton Woods Agreement in 1971.

Why do Federal Reserve decisions affect the US Dollar?

Monetary policy, determined by the Federal Reserve (Fed), is the single biggest influence on the US Dollar’s value. Adjusting interest rates is the Fed’s main means of pursuing its two mandates: price stability, through inflation control, and full employment. If prices climb too rapidly and inflation exceeds the Fed’s 2% target, it will increase interest rates, supporting the USD. Conversely, inflation below 2% or an excessively high Unemployment Rate may prompt the Fed to cut rates, putting pressure on the Greenback.

How does Quantitative Easing work, and what does it mean for the US Dollar?

When conditions become extreme, the Federal Reserve can print additional Dollars and introduce quantitative easing (QE). Through QE, the Fed sharply expands the supply of credit within a financial system that has become blocked. This unconventional policy is deployed when credit dries up because banks, fearing counterparty defaults, refuse to lend to one another. It serves as a last resort when interest rate cuts alone are unlikely to deliver the required outcome. During the Great Financial Crisis in 2008, the Fed chose QE to tackle the credit crunch. The process entails printing more Dollars to purchase US government bonds, mainly from financial institutions. The US Dollar typically weakens as a result of QE.

How does Quantitative Tightening work, and what does it mean for the US Dollar?

Under quantitative tightening (QT), the Federal Reserve reverses the process: it ceases purchasing bonds from financial institutions and allows its existing bond holdings to mature without reinvesting the principal in fresh purchases. This generally supports the US Dollar.

(The technical analysis of this story was written with the help of an AI tool. Know more.)