US Dollar Index weakens to near 99.50 as Fed rate cut bets rise
- US Dollar Index softens to around 99.60 in Wednesday’s Asian session.
- Private payrolls lost an average of 13,500 jobs over the past four weeks.
- Traders await the US Durable Goods Orders, weekly Initial Jobless Claims, Chicago PMI and Fed Beige Book on Wednesday.
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 negative note near 99.60 during the Asian trading hours on Wednesday. The DXY extends the decline as traders anticipate the US interest rate cut in December.
Softer-than-expected US economic data released on Tuesday has boosted the expectation of the US Federal Reserve (Fed) rate reduction next month, which undermines the US Dollar broadly. Data released by the US Census Bureau showed that Retail Sales in the United States (US) increased by 0.2% MoM in September, versus the 0.6% rise prior. This figure came in softer than the estimation of 0.4%.
Meanwhile, the US Producer Prices Index (PPI) climbed 2.7% YoY in September, compared to 2.7% in August (revised from 2.6%), in line with expectations. The core PPI rose 2.6% YoY in September versus 2.9% prior (revised from 2.8%), softer than the consensus of 2.7%.
Furthermore, further signs of a weakening US labor market contribute to the DXY’s downside. The Automatic Data Processing (ADP) revealed on Tuesday that private employers shed an average of 13,500 jobs for the four weeks ending November 8, compared to the previous reading of -2.5K.
The US Durable Goods Orders, the weekly Initial Jobless Claims, the Chicago Purchasing Managers Index (PMI), and the Fed Beige Book will be in the spotlight later on Wednesday. In case of the stronger-than-expected outcomes, this could lift the DXY in the near term.
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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