United States Dollar holds gains near 99, all eyes on Jackson Hole Symposium
- The US Dollar Index trades firmly near 99 amid a sticky US PCE Inflation report for July.
- Both the US headline and core PCE Price Index remained steady at 3.7% and 3.3% YoY, respectively.
- Investors keenly await fresh headlines from the Jackson Hole Symposium.
The US Dollar (USD) clings to previous day’s gains on Thursday, driven by a sticky United States (US) Personal Consumption Expenditure (PCE) Price Index report for July.
In the early European session, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades firmly near 99.00.
On Wednesday, the US core PCE inflation, which is the Federal Reserve’s (Fed) preferred inflation gauge, arrived in line with estimates and the prior release of 3.3% Year-on-Year (YoY). In the same period, the headline PCE Price Index also grew at a steady pace of 3.7% YoY, while it was expected to cool down to 3.6%.
Fed’s interest rate expectations for the September meeting or later have barely moved after the inflation data release.
According to the CME FedWatch tool, the odds of the Fed leaving interest rates unchanged in the September policy meeting are almost steady at 64%.
Meanwhile, financial market participants shift their focus to the Jackson Hole Symposium, where Fed Chairman Kevin Warsh is scheduled to speak on Friday.
Fed independence and communication under scrutiny as Warsh weighs guidance stance
Economists at DBS Group Research highlight that Kevin Warsh would confront a complex policy communication challenge if he were to steer the Fed. They argue that “overall, Warsh faces a difficult balancing act: defending the Fed’s independence and price-stability mandate while providing greater clarity on the Fed’s reaction function without abandoning his preference for less forward guidance.” This tension between preserving institutional autonomy and limiting explicit forward guidance, while still offering markets enough transparency on the policy path, is seen as a key issue for Dollar watchers as upcoming US data and Fed events loom.
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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