US Dollar Index strengthens to near 99.50 as record-long government shutdown ends
- US Dollar Index trades in positive territory around 99.50 in Thursday’s Asian session.
- Trump signed a bill to end the record-breaking US shutdown.
- Markets expect that the US rate cuts in December are still on the table.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, trades on a positive note around 99.50 during the Asian trading hours on Thursday. The DXY gains ground after a record-long US government shutdown ends as US President Donald Trump signs a funding bill.
A prolonged shutdown in US history ended on Thursday after Trump signed a funding bill to reopen the government, per CNN. The House of Representatives approved the bill earlier Thursday in a 222-209 vote, with nearly every Republican and a handful of Democrats voting for it. The positive developments could provide some support to the US Dollar in the near term.
Nonetheless, the reopening will trigger the release of a backlog of economic data, even though the White House said on Wednesday that jobs and consumer price figures for October may never be released. Analysts believe that resumption of US economic data will point to a slowing economy, and that would prompt the Federal Reserve (Fed) to reduce interest rates in December. The markets are now pricing in nearly a 64% chance of a Fed rate reduction in December, according to the CME FedWatch tool.
Fed policymakers are divided on rate reductions amid inflation concerns. Fed Governor Stephen Miran described US monetary policy as too tight, mainly because he believes cooling housing inflation is easing price pressures. Atlanta Fed President Raphael Bostic said on Wednesday that he favors leaving interest rates where they are until there is "clear evidence" that inflation is moving back to the Fed's 2% target.
Fed officials are scheduled to speak later on Thursday, including Neel Kashkari, Alberto Musalem and Beth Hammack. These remarks could offer clues about future monetary policy. Any hawkish comments from Fed officials could boost the USD, while the dovish remarks could drag the Greenback lower.
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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