US Dollar slumps further as Fed decision nears
- The US Dollar Index falls and hits a low of 99.30 ahead of the Fed policy meeting.
- 10-year Treasury yield remains steady at 4.35% as investors await Fed decision.
- US President Trump signals trade deals are close but offers no concrete details.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against a basket of currencies, remained under heavy selling pressure on Tuesday as investors turned defensive ahead of the Federal Reserve’s (Fed) monetary policy decision. Markets also reacted to broad trade policy ambiguity and renewed strength in Asian currencies.
Daily digest market movers: US Dollar pressured by Fed caution and Asia flows
- US Treasury yields stayed flat at 4.35%, even as the Treasury prepares to auction $39 billion in 10-year notes, indicating muted market appetite.
- US Treasury Secretary Scott Bessent said trade talks with 17 partners are active, but no engagement has occurred with China, fueling speculation.
- Commerce Secretary Howard Lutnick added pressure for a major trade deal, saying the first deal must be with a “top ten” economy.
- Taiwan Dollar’s recent surge continues to influence FX flows into Asia, with the Singapore Dollar and Malaysian Ringgit also strengthening.
- Trump reiterated that while some trade deals may be signed soon, no country must make a deal under current conditions.
- The swaps market now anticipates the Fed’s first rate cut in July, with two more 25 basis point reductions expected by year-end.
- The Trump administration denied plans to renegotiate the USMCA, calling it a “good deal,” while reaffirming protectionist auto sector policies.
- Fed Chair Jerome Powell’s press conference following Wednesday’s meeting could define the next policy move, with markets watching for dovish cues.
- US officials say upcoming announcements may not focus on trade, suggesting a broader communications strategy ahead of Trump’s travel.
- Asian FX strength suggests regional economies may tolerate appreciation to ease trade tensions, diverging from historic depreciation norms.
US Dollar Index Technical Analysis: Tipping its toes
The US Dollar Index (DXY) is trading around 99.46, down 0.32% on the day, showing a bearish bias. Price action ranges between 99.26 and 100.10. While the Relative Strength Index (RSI) sits at 39.41 (neutral), the Moving Average Convergence Divergence (MACD) indicates a buy signal. The Bull Bear Power (-0.35) and Ultimate Oscillator (49.76) are both neutral. Key SMAs at 99.94 (20-day), 105.31 (100-day), and 104.37 (200-day) show bearish sentiment. Resistance is seen at 99.73 and 99.59 (10-day EMA and SMA), with no clear support confirmed.
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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