The US Dollar Index reclaimed the 91.00 level with sentiment favoring the greenback, caused by better than expected manufacturing data released on Monday.
Good economic data in manufacturing activities has helped the US Dollar Index move higher. The $1.9 trillion stimulus package will bring in more cash into the economy, which is another reason for the strengthening greenback. The vaccine trade is keeping the greenback positive, boosting confidence among people.
The bond yield increase makes the greenback a safe-haven asset. US yields are higher, revisiting the 1.44% area last seen in February 2020. However, the huge fiscal stimulus may bring a hike in inflation, and it triggers panic in investors.
The US Dollar Index (DXY) rose to one-month highs against major currencies on Tuesday. The DXY touched 91.40 levels during the early hours of trade on Tuesday and is trading on the fourth day of continuous gain.
The index managed to reach the 91.00 levels, after a strong bounce in yields, though it slid lower during mid-trade.
US Dollar Index Strengthened by $1.9 Trillion Stimulus Package
The Biden administration has passed a $1.9 trillion stimulus package on Saturday. The fiscal stimulus is expected to strengthen the US dollar for now. The stimulus will stabilize the economy and prevent the coronavirus spread, say experts. $1,400 will be paid as a direct payment to households. Billions are allotted towards vaccine distribution, nutrition assistance, and small business relief.
Households in the US will get another stimulus grant of $1,400, apart from the $600 in January that will bring in consumer spending again. Trade, especially in small businesses is expected to improve.
However, there is stiff opposition to the very large and expensive stimulus, stating that it would trigger inflation in the country and increase interest rates.
US Economic Sentiment Boosts the US Dollar
Economists believe that there will be a significant rebound in 2021, aided by the government stimulus and covid vaccinations distributed throughout the country. The low interest-rate policy by the Federal is helping to bring a sharp surge in economic conditions.
Unemployment Claims by new applicants have gone down to November lows. In January, Initial Unemployment Claims touched a peak of 900,000 but fell to 111,000 in February, according to data released by the Labor Department. Vaccination is improving confidence among the people, which has improved consumer spending and stimulates more job openings.
Crude oil prices saw a rise by $1, at the start of the week. In the Organization of the Petroleum Exporting Countries (OPEC) meeting to be held this week, an announcement of a further increase in production to meet global needs is expected.
The ISM Manufacturing PMI shows a higher reading in February 2021 at 60.8. In January, the reading was at 59.2. The better-than-expected figure shows that factories are picking up despite troubling times. However, a shortage in inventories has hampered more activity in the manufacturing sector. Factory activity shows the strongest expansion since 2018. Production, new orders, new export orders, and employment have attributed to an increase in the manufacturing sector.
The HIS Markit US Services PMI has gone up in February to 58.9, higher than the previous month figure at 58.3. The service sector has shown the strongest expansion since March 2015. Business growth is picking up despite restrictions and lockdown in various parts of the United States in 2021.
Federal Open Market Committee (FOMC)
Inflation is higher, causing some concern to the economic condition. The Federal Open Market Committee (FOMC) claims that the pandemic-induced crisis in the US requires further fiscal support and safe health guidelines. Federal Chairman Jerome Powell states that the Fed is committed to reaching a lasting recovery in 2021. Fed rates are to remain at the near-zero position at 0.25%. We are working towards a “full recovery” states Powell, though unemployment remains a concern and small businesses are affected. He also laid stress on social-distancing and wearing masks as preventive measures to be followed.
The British pound is on a declining trend after almost reaching a three-year high at 1.4240 levels. An increase in bond yields and a fear of higher inflation is worrying investors, keeping the greenback above the 91.00 mark. It is pulling the Sterling lower towards mid-February levels at 1.3950. In the current year, the sterling has been the best performing G-10 currency.
The euro is down against the dollar, almost touching one-month lows at $1.2012 during trading hours on Tuesday. Though it broke the 1.20 zone, it recovered to 1.2080 levels again. Investors can ride through the volatility in the EUR/USD as the currency pair is moving within a limited range.
China’s banking regulators are “worried” about the global financial market risks, sparking fresh concerns across Asia. A bubble is building up, caution regulatory authorities. Guo Shuquing, Chairman of the Banking and Insurance Regulatory Commission, says that there is a bubble created in the US and European markets. His remarks caused a jitter among the Asian markets.
The Australian dollar is down 0.3% against the dollar after the RBA decided to keep interest rates unchanged at historic low levels.