US Dollar Index holding steady after Fed holds rates, but Powell still looms
- The US Dollar Index held steady, albeit with a slight jostle after the Fed held its main reference rate steady, as expected.
- The Fed's dot plot also shuffled slightly, but policymakers remain cautious about rate cuts.
- Fed Chair Jerome Powell's press conference is up next.
The US Dollar Index (DXY) is trading mostly in place on Wednesday, cycling quickly in place after the Federal Reserve (Fed) delivered a widely-anticipated interest rate hold. The Fed's Summary of Economic Projections (SEP) showed an equally-middling picture, with the Fed's dot plot of rate expectations shuffling slightly near the 3.0% mark but policymakers seeing a slight uptick in Gross Domestic Product (GDP) growth in 2026.
Up next, Fed Chair Jerome Powell will deliver his last post-rate call press conference before his term at the head of the Fed expires mid-May.
More to come....
DXY 15-minute chart
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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