Forex Today: US yields fall further as US Dollar decline continues

22 October, Thursday: Key market developments to watch

Near 101.50, the USD Index has reached a three-week low. Demand for the US Dollar (USD) remains subdued on Thursday. Scheduled data releases include weekly Initial Jobless Claims from the United States (US) and the Eurozone’s preliminary October Consumer Confidence reading.

Risk appetite drove financial markets during Wednesday’s American session, leaving the USD weaker against its major peers. Building on Tuesday’s rally, Wall Street’s main indices opened higher and delivered strong midweek gains. The 10-year US Treasury bond yield, meanwhile, fell further. By early European trading on Thursday, the yield remains below 5.1%, down about 0.6% on the day. US stock index futures are trading lower, signalling risk aversion, but the USD Index is still struggling to recover momentum.

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

Dollar remains soft; ING flags greater downside risk

ING analysts link the Dollar’s tendency to “continues to trade with a soft undertone” to “some aftereffects of AI-related concerns (Corewave bonds had another wobble yesterday) and stretched longs/ short-term overvaluations being unwound.” Following that adjustment, their assessment is that “the dollar no longer looks particularly stretched on our short-term valuation metrics”. However, they caution that the recent “softer dollar backdrop has shifted the balance of risks somewhat further in a USD-bearish direction.” ING nevertheless continues to “favour a gradual and orderly dollar decline rather than a sharper depreciation”. In support of a controlled currency decline, the analysts argue that “the broader Fed, oil and rates narrative remains supportive”.

US Dollar Performance This Week

Against the major currencies listed below, the US Dollar (USD) recorded its weakest performance this week versus the Australian Dollar. The table presents the USD’s percentage changes against each currency over the week.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		-0.53%	-0.67%	-0.53%	-0.65%	-0.76%	-0.60%	-0.61%
EUR	0.53%		-0.12%	0.02%	-0.09%	-0.15%	-0.05%	-0.06%
GBP	0.67%	0.12%		0.15%	0.06%	-0.01%	0.08%	0.11%
JPY	0.53%	-0.02%	-0.15%		-0.11%	-0.22%	-0.06%	0.04%
CAD	0.65%	0.09%	-0.06%	0.11%		-0.11%	0.10%	0.08%
AUD	0.76%	0.15%	0.01%	0.22%	0.11%		0.09%	0.10%
NZD	0.60%	0.05%	-0.08%	0.06%	-0.10%	-0.09%		0.02%
CHF	0.61%	0.06%	-0.11%	-0.04%	-0.08%	-0.10%	-0.02%

Percentage movements between the major currencies are displayed in the heat map. Select the base currency in the left-hand column and the quote currency in the top row. For instance, choosing the US Dollar on the left and reading across to the Japanese Yen gives the percentage change for USD (base)/JPY (quote) in the corresponding cell.

According to Bloomberg, Iran’s Foreign Minister Abbas Araghchi said on Wednesday that the US must end its naval blockade and demonstrate a serious commitment to ending the war through diplomacy. Araghchi said: “Iran is prepared to give diplomacy another chance if we see strong evidence of a sincere desire on the part of the US to achieve a just and honourable solution to permanently end this conflict,”. Crude oil is edging up on Thursday after Wednesday’s marginal decline. West Texas Intermediate (WTI) is gaining more than 1.5% per barrel on the day.

EUR/USD is gathering momentum, posting a small daily gain just below 1.1250. Growing investor unease over France’s political turmoil and uncertain fiscal outlook is nevertheless limiting the pair’s advance. France’s 10-year bond yield is extending its rise on Thursday after exceeding 5% for the first time since June 2002. It was last trading around 5.05%.

GBP/USD is consolidating near 1.3400 early on Thursday, having ended Wednesday higher for a second straight session.

After an inconclusive session on Wednesday, USD/JPY is facing sustained, heavy selling pressure on Thursday. Trading below 157.20, it has reached its lowest point since early October.

Gold (XAU/USD) is down more than 1% on Thursday, trading just under $4,100. Lower US yields and widespread USD weakness have failed to provide much support.

US Dollar: Key Questions Answered

US Dollar: What Is Its Role?

As the official currency of the United States of America, the US Dollar (USD) also circulates alongside local banknotes as the ‘de facto’ currency in a substantial number of other countries. No currency is traded more widely. Based on 2022 data, it accounts for over 88% of global foreign exchange turnover, equivalent to average daily transactions of $6.6 trillion. After the Second World War, the USD replaced the British Pound as the world’s reserve currency. Gold backed the US Dollar for most of its history, until the Bretton Woods Agreement in 1971 marked the end of the Gold Standard.

Federal Reserve Policy: How Does It Affect the US Dollar?

Monetary policy, set by the Federal Reserve (Fed), is the single biggest influence on the US Dollar’s value. Price stability, meaning control of inflation, and full employment form the Fed’s dual mandate. Adjusting interest rates is its main means of pursuing those objectives. If prices climb too rapidly and inflation exceeds its 2% target, the Fed raises 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.

Quantitative Easing: What Does It Mean for the US Dollar?

When conditions become extreme, the Federal Reserve can create additional Dollars and introduce quantitative easing (QE). This process substantially expands credit flows through a stalled financial system. QE is an unconventional policy response to credit drying up when banks refuse to lend to one another for fear of counterparty default. It serves as a last resort if interest rate cuts alone are unlikely to deliver the required outcome. During the Great Financial Crisis in 2008, the Fed chose this tool to tackle the credit crunch. Under QE, newly printed Dollars are used to purchase US government bonds, mainly from financial institutions. The US Dollar typically weakens as a result.

Quantitative Tightening: What Does It Mean for the US Dollar?

Under quantitative tightening (QT), the process is reversed: the Federal Reserve ceases bond purchases from financial institutions and makes no new purchases with principal repaid as its existing bonds mature. This generally supports the US Dollar.