US Dollar Index takes a step down after FOMC rate hold
- The US Dollar Index knocked a few points lower following the Fed's latest rate call and dot plot update.
- The FOMC still sees 50 basis points in cuts in 2025, but policy uncertainty has widened the dot spread.
The US Dollar Index (DXY) whipsawed on Wednesday after the Federal Reserve's (Fed) Federal Open Market Committee (FOMC) kept interest rates unchanged, as investors had broadly expected. The Greenback continues to churn in a long-tailed midrange near the 98.60 region as traders await Fed Chair Jerome Powell's upcoming press conference and follow-up Q&A session.
The Fed still sees an average of 50 basis points in interest rate cuts by the end of the year, following closely with what is priced in according to the CME's FedWatch Tool; however, ongoing trade policy uncertainty has pushed the spread of policymaker rate expectations wider, with some Fed personnel seeing higher year-end rates compared to the previous Summary of Economic Projections (SEP).
more to come...
Market reaction
The US Dollar Index is slightly lower following the FOMC's rate call and dot plot update. US Dollar positioning overall is largely unchanged on the day as investors await Fed Chair Powell's press conference and the following Q&A session.
Dollar Index 5-minute chart
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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