US Dollar Index drops to near 99.20 ahead of key US data
- The US Dollar Index trades lower around 99.20 ahead of the US ADP Employment Change and the ISM Services PMI data.
- Economists expect the US private sector to have added 10K fresh workers in November.
- Higher chances of White House adviser Hassett replacing Fed’s Powell as next Chairman have weighed on the US Dollar.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.1% lower to near 99.20 during the Asian trading session on Wednesday. The US Dollar (USD) is under pressure amid growing expectations that White House Economic Adviser Kevin Hassett could be hired as the successor of Federal Reserve (Fed) Chairman Jerome Powell, when his term ends in May.
The odds of White House adviser Hassett being chosen as the Fed’s next Chairman increased on Tuesday after United States (US) President Donald Trump mentioned his name while addressing reporters. "I guess a potential Fed chair is here too. Am I allowed to say that? Potential. He’s a respected person, that I can tell you. Thank you, Kevin," Trump said, Reuters reported.
Market experts are of the view that White House adviser Hassett’s selection as the Fed’s chair would be unfavourable for the independence of the central bank, given Hassett's being a vivid follower of US President Trump’s economic policies. Trump’s policies have always favoured lower interest rates, and he has criticized Fed Chair Powell numerous times for holding Federal Fund Rates at a higher level.
On the economic data front, investors await the US ADP Employment Change and the ISM Services PMI data for November, which will be published during the North American session. The ADP Employment Change data is expected to show that private employers added fresh 10K workers, significantly lower than 42K in October. The ISM Services PMI is seen lower at 52.1 from 52.4 in October.
Signs of weakness in both economic data, especially the private sector employment report, would prompt expectations of an interest rate cut by the Fed in the December policy meeting.
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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