US Dollar Index falls to near 99.00 amid Fed probe, rate cut doubts
- US Dollar Index declines as traders adopt caution after federal prosecutors open a criminal investigation into Fed Chair Powell.
- Traders reassess Fed rate-cut prospects after weaker-than-expected December job growth.
- The US Dollar may strengthen amid rising geopolitical tensions after President Trump warned Tehran against using force on protesters.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is halting its four-day winning streak and trading around 99.00 during the Asian hours on Monday.
Market caution has grown around the Federal Reserve after federal prosecutors opened a criminal investigation into Fed Chair Jerome Powell over the central bank’s Washington headquarters renovation and whether he misled Congress about the project’s scope, the New York Times reported Sunday.
The Greenback faces challenges as traders assess the likelihood of further US Federal Rate cuts after the recent jobs report showed job growth fell short of expectations in December. US Nonfarm Payrolls (NFP) rose by 50,000 in December, falling short of November's 56,000 (revised from 64,000) and came in weaker than the market expectation of 60,000. However, the Unemployment Rate ticked lower to 4.4% in December from 4.6% in November.
Richmond Fed President Tom Barkin said the decline in the unemployment rate was welcome and described job growth as modest but stable. Barkin added that it is difficult to find firms outside healthcare or AI that are hiring and said it remains unclear whether the labor market will tilt toward more hiring or more firing.
Traders continue to price in two Fed rate cuts this year, though the central bank is widely expected to keep policy unchanged later this month. According to the CME Group's FedWatch tool, Fed funds futures continue to price in about a 95% probability that the US central bank will keep rates unchanged at its January 27–28 meeting.
However, the US Dollar may further gain ground amid increased geopolitical tensions. US President Donald Trump warned Tehran against using force on demonstrators and signaled possible action if the crackdown intensifies, while Iranian officials cautioned against any US or Israeli intervention. Meanwhile, European countries led by the UK and Germany are considering increasing their military presence in Greenland to bolster Arctic security.
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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