US Dollar (DXY): Weaker after Hitting 10-Week High Amid Debt Ceiling Concerns

Highlights

• U.S. Dollar reverses trend due to debt ceiling concerns.
• Yen strengthens as Japanese officials intervene in the currency market.
• Dollar volatility influenced by debt ceiling issue and end-of-month profit-taking.

Overview

On Tuesday, the U.S. Dollar posted a dramatic technical reversal top, indicating a possible shift in momentum to the downside despite the market’s strong uptrend. This reversal was driven by nervousness surrounding a vote on a debt ceiling deal scheduled before the June 5 deadline. Alongside this, a drop in Treasury yields and a surge in the Japanese Yen also contributed to the decline in prices.

During European trading, the dollar index, which measures the U.S. currency against six major peers, initially reached its highest level in 10 weeks at 104.53. However, it later retreated and dropped as low as 103.870 before partially recovering to 104.140.

US Dollar Volatile as Yen Surges

The Dollar experienced volatility on Tuesday, initially witnessing a 10-week high against its peers and a six-month high against the yen. However, this upward trend reversed after Japanese officials intervened to support their currency. Japanese authorities expressed their commitment to closely monitor currency market movements and take appropriate actions. As a result of the unscheduled meeting, the yen strengthened and maintained its gains. It rose by 0.42% against the dollar, reaching a level of 139.85, which marked its highest point since November 2022.

Regarding other currencies, the euro saw a recovery, rising by 0.12% to $1.0718 from a two-month low. Similarly, the pound traded at $1.2391, showing a 0.26% increase during the day.

Debt Ceiling Fluctuations Impact Dollar

Meanwhile, the dollar continued to fluctuate in reaction to the debt ceiling issue. Over the weekend, U.S. President Joe Biden and Republican House Speaker Kevin McCarthy agreed to temporarily suspend the U.S. debt ceiling and implement spending caps to avoid a debt default. Treasury Secretary Janet Yellen had previously warned of a possible default as early as June 5, but the new agreement extended the deadline. The deal is expected to be voted on in the Republican-controlled House of Representatives on Wednesday and later in the Senate, controlled by the Democrats. Although some Republicans expressed disagreement with the deal, there is optimism that a resolution will be reached before the deadline.

Dollar Dips Amid Profit-Taking

Some analysts believe that the dollar’s dip, despite the debt ceiling deal, may be a result of end-of-the-month profit-taking. Given the month-long positive performance of the dollar and uncertainty regarding the U.S. Federal Reserve and the economic outlook, some market participants chose to reduce their positions.

Traders Await Nonfarm Payroll Data

Looking ahead, market focus will be on the release of nonfarm payroll data on Friday, which will provide important insights into the strength of the U.S. labor market. There is anticipation for disappointing job numbers, as the job market has been exceptionally strong for some time.

Technical Analysis

The main trend is up, however, Tuesday’s technical reversal down suggests momentum may have shifted to the downside.

Early in the session, the index took out 104.406 (R1), but settled below it. This re-established the level as resistance.

A sustained move over 104.406 (R1) will indicate the buying is getting stronger. This could trigger an acceleration to the upside with 104.720 (R2) the first target, followed by 105.490 (R3).

A sustained move under 104.406 (R1) will signal the return of sellers. If this creates enough downside momentum then we could see a retest of 103.631 (S1).

For a look at all of today’s economic events, check out our economic calendar.