US Dollar adds more ground and shows no mercy

• Dollar and US Treasury yields continue to march higher.
• IMF raised its US economic growth projections to 2.8% (+0.2 ppt) for 2024.
• The recent Fed Beige Book indicated that inflation had continued to moderate.

The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, rose near a three-month high as traders flocked to the US Dollar on Wednesday.

The rally was driven by persistent global economic divergence, a more hawkish Federal Reserve (Fed), and upbeat US growth projections by the International Monetary Fund (IMF). The Fed Beige Book hinted at moderating inflation and sustained economic activity.

Daily digest market movers: US Dollar rises on election uncertainties, strong economy

• The robust US economy and election uncertainties continue to bolster the US Dollar.
• The IMF upgraded its US growth forecasts, projecting 2.8% growth for this year and 2.2% for next year.
• The US outpaces its peers as IMF lowered eurozone growth forecasts to 0.8% for this year and 1.2% for next year.
• Economic divergence favors the US Dollar, contributing to monetary policy divergence that supports its strength.
• The Fed Beige Book indicates moderating inflation with selling prices increasing modestly across most districts.
• Economic activity remains mostly unchanged since early September with some districts reporting modest growth.

DXY technical outlook: DXY sees more gains, will eventually correct

The DXY index has surged above its 200-day SMA, indicating a positive trend. The Relative Strength Index (RSI) is in overbought territory, suggesting a potential correction. Supports at 104.50, 104.30 and 104.00 may provide downside protection.

Resistance levels at 104.70, 104.90 and 105.00 could limit the index's upside momentum. The index's performance relative to its Simple Moving Average (SMA) and Moving Average Convergence Divergence (MACD) should be monitored for further confirmation.

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

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