US Dollar Index extends the rally above 98.00 amid negative mood
- The US Dollar Index trades in positive territory for the third consecutive day around 98.10 in Monday’s early European session.
- Trump's latest tariff threats boost the US Dollar against its rivals.
- US June CPI inflation report will take center stage later on Tuesday.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, attracts some buyers to a near three-week high at 98.10 during the early European session on Monday. Renewed trade tensions triggered by US President Donald Trump weigh on risk sentiment, lifting the Greenback.
Trump on Saturday threatened to impose a 30% tariff on imports from two of the largest US trading partners, the European Union (EU) and Mexico, beginning August 1. German Chancellor Friedrich Merz noted that he will work closely with French President Emmanuel Macron and von der Leyen over the coming weeks to resolve the escalating trade dispute with the US. Meanwhile, the escalating trade tensions between the US and EU might boost the safe-haven flows, supporting the DXY in the near term.
Chicago Fed President Austan Goolsbee said over the weekend that fresh tariffs unveiled by Trump have further muddied the inflation outlook, making it more difficult for him to support the rate cuts that the President has pressed for. Traders reduce their bets on a US Federal Reserve (Fed) rate cut, pricing in just over 50 basis points (bps) worth of easing by December. The cautious stance of the US central bank might cap the upside for the DXY.
Traders will take more cues from the US Consumer Price Index (CPI) inflation data for June, which is due later on Tuesday. This report might offer some hints about the future path for US interest rates. Economists expect US inflation to have picked up slightly last month. However, any signs of softer-than-expected inflation could push Fed rate reduction expectations, undermining the US Dollar 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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