US Dollar Index steadies near 97.50, potential downside appears on Fed rate cut bets
- US Dollar Index may lose ground amid rising odds of multiple Fed rate cuts this year.
- Traders expect the US Federal Reserve will cut rates by 25 basis points on Thursday.
- Trump's economic adviser Stephen Miran is expected to be sworn in as a Fed governor ahead of the policy meeting.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is remaining steady and trading around 97.60 during the Asian hours on Monday. The Greenback may come under pressure as a softening labor market raises the chances of the Federal Reserve delivering its first rate cut of the year on Thursday.
Traders anticipate the US Federal Reserve (Fed) will cut rates by 25 basis points at its September meeting, with a slim possibility of a 50-basis-point move. Markets have also priced in continued easing through 2026 to guard against a potential recession.
Expectations for multiple Fed cuts strengthened after US weekly initial jobless claims rose to their highest level since October 2021, following a weak nonfarm payrolls report, which overshadowed a hotter-than-expected consumer inflation reading.
Reuters reported that Morgan Stanley and Deutsche Bank now expect the Federal Reserve to deliver three rate cuts this year, after recent data pointed to easing inflation pressures. In separate notes on Friday, the brokerages projected 25-basis-point reductions at each of the Fed’s remaining meetings in September, October, and December.
Traders are also keeping their eyes on whether President Donald Trump's economic adviser Stephen Miran will be sworn in as a Fed governor before the policy meeting. According to Reuters, citing the Senate schedule set by Republican leaders, the full Senate vote on his confirmation is scheduled for Monday evening.
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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