Are weak tech earnings weighing on the United States Dollar Index?

Pressure on the US Dollar Index persists as underwhelming megacap earnings raise doubts over whether the AI trade can be sustained.
Alternative safe-haven currencies gained support as the Middle East conflict intensified and the prospect emerged of US-Israeli strikes on Iran after the midterm elections.
Despite markets assigning a high probability to another rate hike, Fed Chair Kevin Warsh indicated no pressing need for further policy tightening.

Subdued sentiment keeps the US Dollar Index (DXY) near 101.60 in Friday’s Asian session, extending its lacklustre run to a fourth consecutive day. The index tracks the US Dollar (USD) against six major currencies.

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

Confidence among investors faltered when quarterly results from several megacap technology companies fell short of expectations. The resulting doubts over the sustainability of the AI trade added to pressure on the Greenback.

Risk aversion has also spread across markets as geopolitical hostilities in the Middle East intensify. Demand for safe havens strengthened on reports that the US and Israel are preparing further military strikes against Iran after the forthcoming midterm elections. Both the Japanese Yen and Swiss Franc have consequently gained support against the Greenback.

There has been little indication from Federal Reserve (Fed) officials of an urgent need to quicken the pace of policy tightening. While Fed Chair Kevin Warsh recently sounded optimistic about the underlying resilience of the US economy, he offered no signal on whether further interest rate increases would be needed. Even with this measured guidance, market participants using the CME FedWatch Tool currently assign a 92.8% probability to rates remaining unchanged at the October 27–28 policy meeting.

Can defensive FX outperform while short-end yields support the Dollar?

A preference for defensive currencies over higher-beta FX is emerging, according to ING analysts, who say the current environment “probably favours a little more outperformance of the defensive currencies over commodity currencies,” but add a qualification: “until the rock-solid short-end of the US yield curve starts to buckle, it is hard to make the case that the Dollar needs to fall across the board,”. Their assessment suggests that resilient front-end US yields continue to underpin the Dollar broadly, even as relative performance across G10 FX shifts towards more defensive currencies.

US Dollar: Frequently Asked 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 local banknotes. Data from 2022 show that it accounts for over 88% of global foreign exchange turnover, equivalent to average daily transactions of $6.6 trillion, making it the world’s most actively traded currency. The British Pound lost its position as the world’s reserve currency to the USD after the Second World War. Gold backed the US Dollar for much of its history, until the Gold Standard ended with the Bretton Woods Agreement in 1971.

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 pursuing its two mandates: maintaining price stability by controlling inflation and promoting full employment. If prices climb too rapidly and inflation exceeds the Fed’s 2% target, it raises 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) to substantially expand credit flows through a stalled financial system. This unconventional policy is used when credit dries up because banks, concerned about counterparty default, 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, QE was the Fed’s preferred response to the credit crunch. Under this approach, the Fed prints 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 reverse of QE, the Federal Reserve ceases bond purchases from financial institutions. It also refrains from reinvesting the principal repaid on maturing bonds in its portfolio into fresh purchases. This process generally supports the US Dollar.