US Dollar Index hovers around 104.50 with a risk-off sentiment
- The US Dollar receives support from the increased risk aversion.
- The upside of the Greenback could be limited due to the dovish sentiment surrounding the Fed’s policy stance.
- The decline in the Treasury yields could put pressure on the US Dollar.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six other major currencies, moves sideways and trades around 104.50 during the early European hours on Wednesday. The decline in the US Treasury yields might have put pressure on the Greenback, with 2-year and 10-year yields on US bonds standing at 4.44% and 4.24%, respectively, at the time of writing.
However, the US Dollar (USD) may face pressure as expectations rise for a Federal Reserve (Fed) rate cut in September. Last week, Fed Chair Jerome Powell noted that the three US inflation readings this year "add somewhat to confidence" that inflation is on track to meet the Fed’s target sustainably, implying that interest rate cuts might be approaching.
According to CME Group’s FedWatch Tool, markets now indicate a 93.6% probability of a 25-basis point rate cut at the September Fed meeting, up from 88.5% a day earlier.
Meanwhile, investors seek fresh developments on the US presidential elections in November. Market experts see Donald Trump winning the elections despite Democrats rallying behind Vice President Kamala Harris as the leading candidate for the presidential nomination. NBC News projected that Harris had secured endorsements from a majority of the Democratic party’s pledged convention delegates. The threshold for securing the nomination is 1,976 delegates, and NBC estimates that Harris has received the support of 1,992 delegates, either through spoken or written endorsements.
Investors are expected to closely monitor the US Purchasing Managers Index (PMI) data, set to be released later in the North American session. Additionally, attention will be on the Gross Domestic Product (GDP) Annualized (Q2) figures, which will be released on Thursday. These reports are anticipated to offer fresh insights into the economic conditions in the United States.
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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