US Dollar Index posts modest gains above 98.00 ahead of US PMI releases
- US Dollar Index trades with mild gains around 98.30 in Thursday’s Asian session.
- Fed policymakers worried about tariffs, inflation and the labor market, FOMC minutes showed.
- Concerns over the Fed’s independence might cap the upside for the US Dollar.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, trades in positive territory near 98.30 during the Asian session on Thursday. The preliminary reading of the US S&P Global Purchasing Managers Index (PMI) reports for August will take center stage later on Thursday.
Traders reduce bets on a rate cut at the Federal Reserve’s (Fed) September meeting after a hotter-than-expected July Producer Price Index (PPI) reading. This, in turn, provides some support to the DXY. Fed fund futures traders are now pricing in an 83% possibility of a Fed rate cut next month, after last week briefly fully pricing in a move, according to the CME FedWatch tool. Traders are pricing in 54 basis points (bps) of reductions by year-end.
Fed officials worried at their July meeting about the condition of the labor market and inflation, though most agreed that it was too soon to lower interest rates, the minutes from the Fed’s July 29-30 meeting showed. Policymakers stated that it would take time to have more clarity on the magnitude and persistence of higher tariffs’ effects on inflation.
The minutes were released two days ahead of a crucial event on Friday. Fed Chair Jerome Powell will deliver his speech during the central bank’s annual symposium at Jackson Hole, Wyoming. His remarks could offer some hints about a short-term direction for the Fed regarding rates as well as a longer-term view on policy.
US President Donald Trump on Wednesday called on Fed Governor Lisa Cook to resign after a staunch ally called for an investigation of the board member’s mortgages. Analysts expect forcing another Fed governor out would create an additional opportunity for Trump to nominate someone who agrees with his push to lower rates. This raised concerns over the Fed’s independence and might undermine the US Dollar.
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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