DXY: US dollar index spikes as dovish Fed and better PPI data boosts greenback

The US dollar index (DXY) is surging today following a relatively dovish interest rate decision by the Federal Reserve. The index is up by 0.40% and is trading at $96.33. The dollar is up against all currencies that make up the index except the Swiss franc and Japanese yen. The two have gained by 0.21% and 0.30% respectively.

Federal Reserve interest rate decision

The Fed delivered its interest rate decision yesterday. As most analysts were expecting, the bank left interest rates unchanged between 0.0% and 0.25%. It also retained its open-ended quantitative easing program.

According to Jerome Powell, the bank will now acquire $80 billion worth of government bonds every month and about $40 billion worth of mortgage-backed securities. This will lead to a significant expansion of balance sheet, which currently stands at more than $7 trillion.

Unlike what some analysts were expecting, the bank did not start a yield curve control program. This is a program in which the bank puts a target on short and medium-term yield of government bonds and ensures that they remain like that. It achieved this by buying the bonds at any price. The Bank of Japan has been controlling the yield of the three-year Japanese Government Bonds (JGBs) for month. In a statement, Marc Chandler of Bannockburn said:

“The dollar is the opposite of risk assets. When it looks like end of days, you want to hold onto the dollar. When it’s not the end of days, a rising tide lifts all boats and the dollar isn’t one of the boats.”

US jobless claims continue to fall

The US dollar index also reacted to the latest report by the Labour department. The data showed that more than 1.542 million Americans applied for unemployment insurance claims in the previous week. This number was better than the 1.55 million that analysts polled by Reuters were expecting.

Besides, it was the best data since March, when the number peaked at 6.8 million. This number means that the number of Americans who have signed for this insurance during the pandemic is more than 40 million.

The lagging continuing jobless claims number declined to 20.9 million from the previous 21 million. This data measures the number of Americans still drawing unemployment benefits.

These numbers comes a few days after the bureau released the official unemployment rate numbers. The data showed that the economy created more than 2.5 million new jobs in May as the unemployment rate dropped to 13.3%.

Meanwhile, in Washington, debate is still going on about whether a new stimulus package is needed. The White House has said that it will request new funding worth about $1 trillion to help stimulate the economy. At the same time, debate is going on about whether to extend the extra $600 a week that people applying for jobless claims get.

DXY reacts to PPI data

The US dollar index also reacted to the May Producer Price Index (PPI) data that was released by the statistics office. The data showed that factory gate prices rose by a seasonally adjusted rate of 0.4% in May after falling by 1.3% in April. The index dropped by 0.8% on an annualized basis after dropping by 1.2% in the previous month.

The core PPI, which excludes the volatile food and energy products, rose by an annualised rate of 0.3%. It declined by 0.1% on a monthly basis.

According to the bureau, the increase in prices was mostly because of an increase in final demand of goods, which rose by 1.6%. This increase was offset by a 0.2% decrease in final demand of services.

These numbers came a day after the bureau released consumer price index (CPI) data. These numbers showed that the headline CPI rose by 0.1% in May while the core CPI rose by 1.2%.

US dollar index technical outlook

The US dollar index rose to an intraday high of $96.50. On the daily chart, the price is above the 50-day and 100-day exponential moving averages while the RSI has remained at the oversold level. Also, the index is forming a bullish engulfing pattern if it ends in the green. Still, there is a possibility that it will continue to decline as bears attempt to move below $96.0.