US Dollar Index hovers around 99.50 due to uncertainty surrounding Fed policy outlook
- US Dollar Index steadies as traders adopt caution amid uncertainty surrounding the Fed stance.
- CME FedWatch Tool indicates pricing in 71% odds of a Fed rate cut in December, up from 66% a day ago.
- Traders await further comments from Fed officials for additional clues on the policy outlook.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is remaining steady and trading around 99.50 during the Asian hours on Friday. The Greenback moves little as improving Federal Reserve (Fed) rate cut bets weaken the impact of the hawkish comments from the Fed Chair Jerome Powell.
According to the CME FedWatch Tool, markets are now pricing in a 71% probability of a Fed rate cut in December, up from 66% the previous day. This, however, marks a decline from nearly 91% earlier, after Fed Chair Jerome Powell cautioned during the post-meeting press conference that policymakers may need to take a wait-and-see approach until official data reporting resumes. Powell also added that another rate cut in December is far from certain, emphasizing that the outlook remains uncertain.
Fed Chair Powell also noted that the central bank is struggling to balance its dual mandate of controlling inflation and supporting employment due to limited data availability amid the ongoing US government shutdown.
The US Fed delivered a 25-basis-point rate cut on Wednesday, bringing down its benchmark rate to a range of 3.75%–4.0% in a 10–2 vote. The decision was not unanimous, as Fed Governor Stephen Miran supported a larger 50-basis-point cut, while Kansas City Fed President Jeffrey Schmid voted to keep rates unchanged.
Meanwhile, the meeting between Presidents Trump and Xi concluded with the US agreeing to reduce tariffs to 47% from 57% on Chinese goods, while China pledged to curb fentanyl exports, increase US soybean purchases, and suspend restrictions on rare earth exports.
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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