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- DXY holds near 108.40 on Tuesday with gains.
- Fed’s hawkish shift in December underpins higher yields.
- Markets digest strong JOLTS and ISM data.
The US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, trades with gains on Tuesday after two days of losses. The Federal Reserve’s (Fed) hawkish tilt supports elevated US bond yields, favoring the USD bulls. Strong labor market and Services PMI figures helped the USD trim losses ahead of December’s Nonfarm Payrolls.
Daily digest market movers: US Dollar recovers after strong data
- US yields keep climbing, with the 10-year note near 4.64% and the 30-year at 4.87%, driven by heavy Treasury auctions this week.
- Fed Vice Chair for Supervision Michael Barr announced an early resignation effective February 28, potentially avoiding legal battles under the next administration.
- December ISM Services Purchasing Managers Index rose to 54.1 from 52.1, beating 53.3 forecasts. Prices Paid jumped to 64.4, stoking inflation concerns.
- Job Openings & Labor Turnover Survey (JOLTS) showed openings at 8.09 million in November, above both October’s 7.83 million and the 7.7 million estimate.
- ADP private payrolls, Challenger job cuts, and weekly jobless claims will round out this week’s labor market data before December Nonfarm Payrolls.
- Geopolitical tensions and potential trade war flare-ups keep safe-haven demand intact, limiting the US Dollar’s downside despite profit-taking.
DXY technical outlook: Indicators stay firm above key support
The US Dollar Index maintains an overall bullish structure, with technical indicators retaining upward momentum. Despite intraday softness, the DXY has successfully defended its 20-day Simple Moving Average (SMA), reflecting solid underlying support.
While near-term overbought signals could prompt modest pullbacks, ongoing demand for US assets and higher yields may keep the index elevated, barring any major risk reversals.
Employment FAQs
Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.
The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.
The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.