Forex Today: US Dollar Retreat Deepens as US Yields Fall Further

What is in focus for markets on Thursday, 22 October?

Weak demand keeps the US Dollar (USD) under pressure on Thursday, pushing the USD Index towards 101.50, its lowest in three weeks. On the economic calendar, attention turns to weekly Initial Jobless Claims from the United States (US) and the Eurozone's preliminary Consumer Confidence reading for October.

Risk appetite dominated financial markets during Wednesday's American session, leaving the USD weaker against its major peers. Building on Tuesday's rally, Wall Street's main indices opened higher and posted substantial midweek gains, even as the 10-year US Treasury bond yield fell further. By early European trading on Thursday, the 10-year yield remains below 5.1%, down about 0.6% for the day. The USD Index is still struggling to recover ground, despite US stock index futures trading lower and signalling a risk-averse mood.

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

Could the Dollar weaken further as ING sees risks turning more bearish?

A gradual decline rather than a steep fall remains ING's preferred outlook for the Dollar, even as its analysts see risks becoming more bearish. They describe the currency as one that “continues to trade with a soft undertone,” citing “some aftereffects of AI-related concerns (Corewave bonds had another wobble yesterday) and stretched longs/ short-term overvaluations being unwound.” Following that adjustment, they say “the dollar no longer looks particularly stretched on our short-term valuation metrics,” while cautioning that the recent “softer dollar backdrop has shifted the balance of risks somewhat further in a USD-bearish direction.” ING nevertheless continues to “favour a gradual and orderly dollar decline rather than a sharper depreciation,” noting that “the broader Fed, oil and rates narrative remains supportive” of an orderly move lower.

How Has the US Dollar Performed This Week?

The Australian Dollar has recorded the strongest performance against the US Dollar this week. The table below sets out the US Dollar's (USD) percentage changes against the major currencies listed.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		-0.53%	-0.67%	-0.53%	-0.65%	-0.76%	-0.60%	-0.61%
EUR	0.53%		-0.12%	0.02%	-0.09%	-0.15%	-0.05%	-0.06%
GBP	0.67%	0.12%		0.15%	0.06%	-0.01%	0.08%	0.11%
JPY	0.53%	-0.02%	-0.15%		-0.11%	-0.22%	-0.06%	0.04%
CAD	0.65%	0.09%	-0.06%	0.11%		-0.11%	0.10%	0.08%
AUD	0.76%	0.15%	0.01%	0.22%	0.11%		0.09%	0.10%
NZD	0.60%	0.05%	-0.08%	0.06%	-0.10%	-0.09%		0.02%
CHF	0.61%	0.06%	-0.11%	-0.04%	-0.08%	-0.10%	-0.02%

To read the heat map, which compares percentage changes across major currencies, select the base currency in the left-hand column and the quote currency in the top row. Selecting the US Dollar on the left and following its row across to the Japanese Yen, for instance, gives the percentage change for USD (base)/JPY (quote) in the corresponding cell.

Bloomberg reported that Iran’s Foreign Minister Abbas Araghchi said on Wednesday that the US must remove its naval blockade and demonstrate a serious commitment to ending the war through diplomacy. Araghchi said: “Iran is prepared to give diplomacy another chance if we see strong evidence of a sincere desire on the part of the US to achieve a just and honourable solution to permanently end this conflict,” Crude oil is moving higher on Thursday after Wednesday's modest decline, with West Texas Intermediate (WTI) gaining more than 1.5% per barrel on the day.

EUR/USD is edging up on the day, finding some buying interest just below 1.1250. Growing investor unease over France's political turmoil and uncertain fiscal outlook, however, continues to limit the pair's gains. Having exceeded 5% for the first time since June 2002, the French 10-year bond yield is extending its rise on Thursday and was last trading around 5.05%.

GBP/USD is consolidating near 1.3400 early on Thursday, after Wednesday brought its second straight daily close in positive territory.

After an inconclusive session on Wednesday, USD/JPY is facing intense selling pressure on Thursday, slipping below 157.20 to its lowest since early October.

Gold (XAU/USD) is down more than 1% on Thursday, trading just under $4,100 as it fails to draw support from lower US yields and widespread USD weakness.

US Dollar: Common Questions

What role does the US Dollar play?

As the official currency of the United States of America, the US Dollar (USD) also serves as the ‘de facto’ currency in a significant number of other countries, circulating alongside their local banknotes. No other currency is traded more widely: according to 2022 data, 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 provided backing for the US Dollar through much of its history, until the Bretton Woods Agreement in 1971 brought an end to the Gold Standard.

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. The Fed's dual mandate combines price stability, through inflation control, with the pursuit of full employment. Interest rate adjustments are its main means of meeting those objectives. If prices climb too rapidly and inflation exceeds the Fed's 2% target, it raises rates, supporting the USD. Conversely, inflation below 2% or an excessively high Unemployment Rate may prompt the Fed to cut interest 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 may resort to printing additional Dollars and introducing quantitative easing (QE). This process sharply expands the supply of credit within a stalled financial system. As an unconventional policy tool, QE is deployed when credit dries up because banks, fearing counterparty defaults, refuse to lend to one another. It is a last resort if 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. Under this approach, it prints additional Dollars to purchase US government bonds, mainly from financial institutions. The usual effect of QE is a weaker US Dollar.

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

Usually supportive of the US Dollar, quantitative tightening (QT) reverses this process. The Federal Reserve halts bond purchases from financial institutions and, as bonds in its portfolio mature, does not use the principal repaid to make new purchases.