United States Dollar Index stalls post-CPI bounce near 100.00 on receding Fed hike bets
- DXY struggles to capitalize on the previous day’s goodish rebound from the post-CPI swing low.
- Diminishing odds for an immediate Fed rate hike turn out to be a key factor capping the USD.
- Geopolitical risks and inflation fears stemming from volatile oil prices limit losses for the DXY.
The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, continues its struggle to build on the momentum beyond the 100.00 psychological mark and edges lower during the Asian session on Thursday. The index, however, remains confined in a nearly two-week-old range, awaiting a fresh catalyst before the next leg of a directional move.
The US Consumer Price Index (CPI) report, released on Wednesday, showed that inflation continued to moderate in July. This comes on top of last Friday's weak US Nonfarm Payrolls (NFP) report and forced traders to further reduce expectations for an immediate interest rate hike by the Federal Reserve (Fed). This, in turn, is seen as a key factor acting as a headwind for the DXY.
Traders, however, remain worried about inflation risks stemming from volatile oil prices due to the US-Iran standoff. In fact, US President Donald Trump said the US had total control over the Strait of Hormuz, even as Iran reiterated its own control over the vital waterway. This keeps geopolitical risks and prospects for some Fed tightening in play, acting as a tailwind for the DXY.
The focus now shifts to the release of the US Producer Price Index (PPI), due later during the North American session. Adding to this, comments from influential FOMC members and further developments surrounding the Middle East crisis should drive US Dollar (USD) demand. In the meantime, the fundamental backdrop warrants caution for aggressive bearish traders.
DXY 4-hour chart
Technical Analysis:
In the four-hour chart, The DXY holds above the 50-period Simple Moving Average (SMA) at 99.82, keeping a mild bullish near-term bias. That said, a sustained break through the 100.00 mark is needed to back the case for further gains. A rejection, however, would negate the bullish tone, though buyers are likely to re-emerge on dips to the 50-period SMA at 99.82.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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