Near 101.00: United States Dollar Index slides to monthly lows after Democratic sweep

A Democratic midterm sweep and lower oil prices weigh on the US Dollar.
Fed rate hike expectations remain supported by robust ADP hiring data and sustained ISM services expansion.
82% is the market-implied probability of a December rate hike. Key jobless claims and payroll figures are due next.

101.20 marks a monthly low for the US Dollar Index (DXY). The index, which tracks the US Dollar (USD) against six major currencies, is declining for a second consecutive day during Thursday’s Asian session.

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Control of both houses of Congress passed to Democrats after their sweep of the US midterm elections. The result fuelled concerns about potential political gridlock in Washington and prompted heavy selling of the Greenback. Expectations that the Middle East conflict would end swiftly also drove oil prices sharply lower, adding to downward pressure on the US currency.

Resilient US economic releases could, however, provide support for the US Dollar by bolstering expectations of a Federal Reserve rate hike. October’s ADP report recorded an increase of 86,000 in private-sector employment, above the 69,000 forecast. September’s reading was revised lower, from 90,000 to 86,000. At the same time, the ISM Services PMI edged down from 54.9 to 54.5. Although slightly below the 54.8 forecast, the reading still signalled solid expansion.

Another December rate hike carries a market-implied probability of nearly 82%, according to the CME FedWatch Tool. Attention now turns to the next key economic releases: weekly US Initial Jobless Claims on Thursday, followed by Friday’s Nonfarm Payrolls (NFP) report.

Technical Analysis: 101.20 Keeps Dollar Index Under Pressure

Dollar Index Spot is trading at 101.20 on the daily chart. Recent recoveries have been unable to regain either the nine-period or the 50-period Exponential Moving Average (EMA). With the index below both dynamic resistance levels, the short-term outlook remains bearish. At roughly 43, the 14-day Relative Strength Index (RSI) is below the neutral 50 threshold. This points to weakening bullish momentum rather than outright oversold conditions.

The 50-period EMA around 101.27 reinforces the first upside resistance level. Further selling interest is expected near the nine-period EMA at 101.72. A daily close above that second level would be required to relieve immediate downward pressure. Before then, rebounds towards these moving averages are likely to draw sellers. Subdued momentum therefore leaves the Dollar Index exposed to another decline.

Chart Analysis Dollar Index Spot — US Dollar Index: Daily Chart View

US Dollar: Key Questions

What role does the US Dollar play?

As the official currency of the United States of America, the US Dollar (USD) also circulates alongside local banknotes in a significant number of other countries, serving as their ‘de facto’ currency. No other currency is traded more heavily. According to 2022 data, it accounts for over 88% of global foreign exchange turnover, equivalent to average daily transactions of $6.6 trillion. The USD replaced the British Pound as the world’s reserve currency after the Second World War. Gold backed the US Dollar for most of its history, until the Bretton Woods Agreement in 1971 brought the Gold Standard to an end.

How does Federal Reserve policy affect the US Dollar?

Monetary policy, set 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 fulfilling its two mandates: price stability, through controlling inflation, and full employment. If prices rise too rapidly and inflation exceeds the Fed’s 2% target, the central bank raises rates, supporting the USD. Conversely, inflation below 2% or an excessively high Unemployment Rate may prompt rate cuts, putting pressure on the Greenback.

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

The Federal Reserve can respond to extreme circumstances by printing additional Dollars and introducing quantitative easing (QE). Through QE, the Fed sharply expands the supply of credit within a stalled financial system. This unconventional policy addresses a credit shortage caused by banks refusing to lend to one another for fear of counterparty default. 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, QE was the Fed’s preferred response to the credit crunch. The process involves printing additional Dollars to purchase US government bonds, primarily from financial institutions. The usual effect is a weaker US Dollar.

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 bond purchases from financial institutions and refrains from reinvesting principal repaid on maturing bond holdings in new purchases. This typically supports the US Dollar.

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