US Dollar Index posts modest losses to near 99.00 as Fed rate cut doubts emerge
- US Dollar Index softens to near 99.15 in Friday’s Asian session.
- Traders pared back bets of a Fed rate cut in December.
- Fed’s Collins said the policy rate will likely need to stay on hold "for some time."
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 99.15 during the Asian trading hours on Friday. The DXY declines as traders brace for a backlog of US data following the government's reopening, which they expect will likely point to a weakening economy.
The federal government is reopening its agencies after US President Donald Trump signed the House-passed funding package on Thursday to end the record 43-day shutdown. The bill extends funding for most agencies until January 30 and includes three full-year funding bills for other parts of the government.
Analysts believe that the resumption of US economic data will show job market weakness and a potential slowdown, which could undermine the US Dollar across the board. The White House indicated on Thursday that the US Unemployment Rate for October may never be available due to the lack of a household survey that month.
Traders scaled back expectations of an imminent Federal Reserve (Fed) interest rate cut amid lingering uncertainty over inflation. Financial markets are now pricing in nearly a 51% odds that the Fed will cut its benchmark overnight borrowing rate by 25 basis points (bps) at its December meeting, down from the 62.9% probability that markets priced in a day ago, according to the CME FedWatch Tool.
Nonetheless, hawkish remarks from the Fed officials might help limit the DXY’s losses. Boston Fed President Susan Collins said that it will likely be appropriate to keep policy rates at the current level for some time to balance the inflation and employment risks in this highly uncertain environment. Meanwhile, Atlanta Fed President Raphael Bostic on Wednesday and Cleveland Fed President Beth Hammack on Thursday also expressed a preference for holding rates steady.
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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