US Dollar Index remains steady near 99.00 ahead of Fedspeaks
- US Dollar Index maintains its position as traders adopt caution ahead of speeches from Fed officials.
- Trump announced plans to appoint both the Fed Chair and a replacement for Kugler by the end of the week.
- Market sentiment remains cautious as investors await President Trump’s upcoming trade deadline on Friday.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is remaining steady after two days of slight gains and trading around 98.80 during the European hours on Wednesday. Traders will likely observe the speeches from the Federal Reserve (Fed) policymakers later in the day, including Susan Collins, Lisa Cook, and Mary Daly.
The Greenback may gain ground as traders adopt caution following US President Donald Trump’s announcement on Tuesday that he will appoint the Fed’s Chair and Kugler’s replacement by the end of the week, and confirmed his choices for Chairman, including White House economic adviser Kevin Hassett, former Fed governor Kevin Warsh, and two other people. Trump also confirmed that Treasury Secretary Scott Bessent is not his choice for the Fed’s Chair.
However, the US Dollar may struggle amid rising bets on an interest rate cut by the US Federal Reserve (Fed) in September. Markets continued to reflect over a 90% probability of a Fed rate cut in September, with roughly 60 basis points of total easing expected by year-end.
Market sentiment remains cautious ahead of US President Donald Trump's latest trade deadline on Friday, when a fresh round of high tariffs will go into effect on multiple nations unless last-minute deals are reached to negotiate lower levies. Trump also threatened to impose tariffs of up to 250% on pharmaceutical imports and potential levies on semiconductors.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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