US Dollar Index hovers around 96.00 ahead of Fed policy decision
- US Dollar Index could face challenges as the “Sell America” narrative dominates ahead of the Fed decision.
- US Senate Majority Leader Thune said parties are negotiating funding with the White House as Democrats threaten a partial shutdown.
- The US Fed is expected to keep interest rates unchanged at 3.50%–3.75% on Wednesday.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is rebounding after four days of losses and hovering around 96.00 during the European hours on Wednesday. The Greenback faced challenges as the “Sell America” narrative continues to dominate sentiment, ahead of the US Federal Reserve (Fed) policy decision.
US Senate Majority Leader John Thune said both parties are negotiating with the White House on US government funding, as Democrats threaten a partial shutdown amid growing public backlash in Minnesota over President Donald Trump’s immigration crackdown, Bloomberg News reported.
The Fed is widely expected to keep rates unchanged at 3.50%–3.75% at the end of its two-day meeting on Wednesday, following three consecutive rate cuts in 2025. Markets will focus on the post-meeting press conference for guidance on the policy outlook in the months ahead.
Jonas Goltermann, deputy chief markets economist at Capital Economics, said in a note, “While there are several potential culprits for the dollar’s drop, the main driver is the fallout from reports that the US Treasury is considering direct currency intervention."
US President Donald Trump stated that the value of the USD is "great" when asked whether he thought it had declined too much. His comments exert some selling pressure on the US Dollar. Traders adopt caution as Trump will soon announce his nominee to replace Fed Chair Jerome Powell, fueling speculation that the next chair could favor faster interest rate cuts.
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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