US Dollar looks for direction as Trump readies Davos remarks
- US traders keep watch on the Federal Reserve’s looming rate decision despite ongoing headlines about cuts.
- President Trump renews criticism of trade imbalances, sparking market chatter about new tax cuts and oil price demands.
- Solid US growth between 2.5% and 3.0% helps underpin the Greenback, though policy ambiguities weigh on sentiment.
- Jobless claims rise slightly, suggesting that labor market conditions remain resilient.
The US Dollar has turned flat during the US trading session on Thursday. US President Trump spoke at the World Economic Forum in Davos. The US Dollar Index (DXY) is back above 108.00, though it is facing some mild selling pressure again.
Daily digest market movers: USD sees red despite Trump hinting at tariffs for Canada and Mexico
- During his World Economic Forum appearance, President Trump restated that the US trade deficit with Canada is unsustainable and underscored his intent to seek deeper tariff measures if deemed necessary.
- He also proclaimed his commitment to slashing business taxes, pressuring OPEC to reduce oil prices and aiming to influence the Federal Reserve’s independence.
- New unemployment filings climbed to 223K for the week ending January 18, slightly above prior forecasts. The insured unemployment rate stands at 1.2% with continuing claims edging higher to nearly 1.9 million.
- Growth in the US economy remains robust at roughly 2.5%–3.0% annualized, powered by hiring gains that support consumption and keep inflation somewhat buoyant. Analysts widely expect the Fed to hold rates steady next week, seeing no compelling argument to cut soon.
- Kansas City Fed Manufacturing data is slated for release with the Services gauge following on Friday. Markets remain attentive to potential headwinds, but leading indicators suggest the US economy retains its underlying strength.
DXY technical outlook: Indicators struggle as the index fails to hold near 108.50
The US Dollar Index continues to fight off selling pressure but has yet to sustain gains beyond 108.50. Momentum signals, such as the Relative Strength Index (RSI), remain below the 50 threshold, indicating a weaker bias. The MACD’s red bars are expanding, hinting at growing bearish momentum.
The DXY stabilized around 108.20, though a lack of follow-through could lead to more downside. Without fresh catalysts to renew buying interest, the Greenback’s rebound may be short-lived, leaving it vulnerable to continued profit-taking.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.