United States Dollar Index trades calmly ahead of US Inflation data
- The US Dollar Index trades flat at around 99.85 ahead of the US CPI data for July.
- According to estimates, the US headline and core CPI grew moderately by 3.4% and 2.5% YoY, respectively.
- Iran confirms it has no ongoing discussions with the US regarding the ceasefire extension.
The US Dollar (USD) reflects a sideways performance against its peers ahead of the United States (US) Consumer Price Index (CPI) data is scheduled to be published at 12:30 GMT.
At press time, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades flat at around 99.85.
US Dollar steadies as markets await pivotal July CPI print for Fed path
Strategists at Brown Brothers Harriman note that “markets are in a holding pattern ahead of today’s critical US July CPI report (1:30 pm London, 8:30 am New York),” with the release expected to be “a key swing factor for Fed funds rate expectations and set the tone across rates, currencies, and broader risk sentiment.” They point out that Fed funds futures currently assign “50% odds of a 25bps hike in September to a target range of 3.75-4.00%, down from a high of 75% end-July,” and are pricing in “just over 40bps of cumulative tightening in the next twelve months.”
BBH expects “US July CPI to firm modestly but stop short of signaling a renewed acceleration in inflation,” with headline CPI forecast to “rise +0.1% m/m vs. -0.4% in June and ease to 3.4% y/y vs. 3.5% in June,” while core CPI is seen “to rise +0.2% m/m vs. 0.0% in June and ease to 2.5% y/y vs. 2.6% in June.” In terms of market reaction, the bank argues that “a soft US CPI would strengthen the case for a dovish repricing in Fed hike expectations and further undermine USD while lifting risk assets.” Conversely, “a hot US CPI will likely deliver a knee-jerk USD bounce via higher front-end yields.” However, BBH cautions that with “Fed policy already restrictive (assuming a neutral rate of 3.00%), the scope for a material hawkish repricing looks limited, which is a USD headwind.”
This week, investors will also focus on the US Producer Price Index (PPI) data for July, which will be released on Thursday.
On the global front, a source from Iran has confirmed that Iran and the US are not having discussions regarding extending the ceasefire, Reuters reports. The source added, “One of the issues that is being discussed is US returning to MoU, defining a time frame for implementing its commitments.”
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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