United States Dollar Index trades under pressure as Yen buying accelerates
- The US Dollar Index extends its decline as a sharp Japanese Yen rally outweighs Fed rate hike expectations.
- Robust US employment data and elevated Oil prices keep the prospect of tighter monetary policy alive.
- US Treasury buybacks and key PPI and CPI data take centre stage ahead of next week’s Fed meeting.
The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, extends its decline on Monday as a sharp rally in the Japanese Yen (JPY) outweighs support from elevated geopolitical tensions and Federal Reserve (Fed) interest rate hike expectations.
At the time of writing, DXY trades around 98.90, down 0.26% on the day, hovering near two-week lows. Trading conditions are expected to stay subdued as US stock and bond markets remain closed for the Labor Day holiday.
USD/JPY falls to a six-and-a-half-month low near 154.40 as hawkish Bank of Japan (BoJ) expectations, capital repatriation and the unwinding of Yen-funded carry trades support the Japanese currency.
Beyond the immediate market moves, persistent inflation concerns, questions over policy credibility and political risks also weigh on the Greenback, keeping the US Dollar debasement conversation alive. Attention will also turn to the US Treasury’s planned buybacks of longer-dated government securities starting Wednesday, which could influence bond yields and broader sentiment toward the currency.
Analysts at HSBC note that Fed Chairman Warsh’s Jackson Hole speech “helped ease one key part of that story by restoring confidence in the Fed’s commitment to fight inflation.” In HSBC’s view, this has “helped reduce the risk that weak policy credibility would become a lasting drag on the dollar,” thereby “denting the debasement narrative, at least for now.”
Traders increased bets on a rate hike at the Fed’s September 15-16 meeting following Friday’s robust employment report. At the same time, elevated Oil prices amid concerns over Middle East supplies add to inflation risks and further reinforce expectations of tighter monetary policy.
Over the weekend, the US military said it struck three Iranian crude Oil tankers on Saturday in response to Iran firing ballistic missiles at two US Navy ships. The Financial Times also reported that Saudi Aramco’s Jazan refinery was hit by a fresh strike on Monday.
According to the CME FedWatch Tool, traders currently see around a 58% chance that the US central bank will raise borrowing costs next week. Ahead of the decision, inflation data will provide a major test for rate expectations, with the Producer Price Index (PP() due on Thursday and the Consumer Price Index (CPI) scheduled for Friday.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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