US Dollar devalues after South Korea confirms talks with US on currencies
- The US Dollar trades weaker again on Wednesday, for a second consecutive day, after softer-than-expected US inflation data.
- The Korean Won strengthens against the Greenback after the announcement that both countries have discussed Forex markets.
- The US Dollar Index nosedives to test the 100-level and bounces just ahead of it.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, is adding to its losses and dives toward the 100-marker, near 100.60 on Wednesday. The downside move comes after softer-than-expected inflation in the US and the confirmation that the United States (US) and South Korea have been in talks about currencies, according to Bloomberg.
The news opened up not-so-old wounds from earlier this month, when the Taiwan Dollar (TWD) appreciated sharply against the US Dollar. In addition, the soft Consumer Price Index (CPI) reading for April released on Tuesday has revamped rate cut bets for the Federal Reserve (Fed) this year, seeing the probability for a rate cut grow bigger compared to last week. This narrows the rate differential between the US and other countries and devalues the Greenback a touch.
Daily digest market movers: Fed and Geopolitical headlines
- US President Donald Trump said that he has good hopes for a breakthrough between Russia and Ukraine on Thursday's meeting.
- Only two Fed speakers for this Wednesday:
- Near 13:10 GMT, Vice Chair Philip Jefferson is set to speak.
- Near 21:40 GMT, Federal Reserve Bank of San Francisco President Mary Daly participates in a fireside chat at the California Bankers Association's 2025 Annual Conference & Directors Forum.
- Equities are trying to brush off the negative tone while US equities see a lift on the back of the several deals US President Trump brings back from his trip to the Middle East.
- The CME FedWatch tool shows the chance of an interest rate cut by the Federal Reserve in June’s meeting at just 8.2%. Further ahead, the July 30 decision sees odds for rates being lower than current levels at 38.6%.
- The US 10-year yields trade around 4.48%, steady as traders mull Tuesday’s inflation numbers and rate cut bets for 2025.
US Dollar Index Technical Analysis: Currencies discussed, Asia in focus again
A headline on possible currency adjustments appears to be enough to set off some devaluation for the Greenback. The fact that South Korea and the US have been in talks is enough to scaremonger markets in anticipation of the actual event happening. Should more headlines be revealed on the matter, or the actual intervention from the Bank of Korea (BoK) take place, expect to see possibly a revisit of the DXY to the multi-year low at 94.56.
On the upside, 101.90 is the first big resistance again as it already acted as a pivotal level throughout December 2023 and as a base for the inverted head-and-shoulders (H&S) formation during the summer of 2024. In case Dollar bulls push the DXY even higher, the 55-day Simple Moving Average (SMA) at 102.29 comes into play.
On the other hand, the previous resistance at 100.22 is acting as firm support, followed by 97.73, near the low of 2025. Further below, a relatively thin technical support comes in at 96.94 before looking at the lower levels of this new price range. These would be at 95.25 and 94.56, meaning fresh lows not seen since 2022.
US Dollar Index: Daily Chart
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.