Risk currencies are not performing as expected following a trade truce between the US and China. Two main reasons are keeping the dollar strong: the market’s reassessment of the Federal Reserve’s interest rate cuts and tight money in US markets. The chance of a 25 basis point rate cut by the Fed in December has fallen to 66%. This change reflects the Fed’s recent actions and important upcoming US economic reports, such as the ISM manufacturing numbers and the ADP jobs report, which could influence the value of the dollar.

Tightness in US Money Markets

Tight conditions in US money markets are marked by low bank reserves and increased cash reserves in the Treasury. Recent data indicates that banks borrowed $50 billion in overnight funds from the Fed, paying higher rates than usual. These tight money conditions often support the dollar. If these funding issues extend internationally, it could negatively impact the EUR/USD exchange rate. The DXY is likely to remain strong, around 100.00 to 100.25, unless US job data changes the outlook for a Fed rate cut. Risk currencies usually benefit from agreements like the US-China trade truce, but that isn’t happening this time. The dollar is still the focus for traders for two main reasons. First, the market is reconsidering how many times the Federal Reserve will actually lower rates. After recent comments from Fed officials, the likelihood of a December rate cut has decreased, which helps keep the dollar stable. For instance, in 2024, the Fed stuck to higher rates longer than many expected, indicating a cautious, data-driven approach.

Upcoming Economic Indicators

We are now looking at private sector data for more clues. The October ISM manufacturing figure was 46.7, indicating a shrinking factory sector and some economic weakness. The ADP jobs report coming this Wednesday will be crucial; significant job losses could push the dollar lower. The second factor boosting the dollar is the tightness in US money markets. The Fed has been shrinking its balance sheet, withdrawing a significant amount of liquidity from the financial system. The balance in the Reverse Repo Facility has fallen by over $2 trillion since its 2023 peak, making dollars rarer and more valuable. These tight conditions usually favor the dollar. We are monitoring whether pressure on dollar funding impacts international markets, which would be negative for currencies like the Euro. Currently, there are no major signs of international strain. Given this situation, traders should expect the Dollar Index (DXY) to remain strong near the top of its range, around 105.00. Betting against the dollar is risky unless upcoming job data shows enough weakness to trigger a strong market expectation of a December Fed rate cut. Create your live VT Markets account and start trading now.

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