US Dollar Index gains traction to above 97.50 amid mixed US economic data
- The US Dollar Index edges higher to near 97.55 in Friday’s Asian session.
- US flash Manufacturing PMI declined to 49.5 in July; the services PMI rose to 55.2 in the same period.
- Investors will keep an eye on US-China trade talks and the FOMC policy meeting next week.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, trades in positive territory for the second consecutive day around 97.55 during the Asian trading hours on Friday. Investors brace for the US Durable Goods Orders for June, which is due later on Friday.
The Greenback holds positive ground amid mixed US economic data. Data released by S&P Global on Thursday showed that the US flash Manufacturing PMI dropped to 49.5 in July from the previous reading of 52.0. This figure came in weaker than the market consensus of 52.5. Meanwhile, the Services PMI rose to 55.2 in July from 52.9 in June, stronger than the 53.0 expected. Finally, the Composite PMI improved to 54.6 in July versus 52.9 prior.
Traders await the Federal Open Market Committee (FOMC) policy meeting next week. The FOMC is expected to hold the rate steady at its July meeting as policymakers prefer to wait for clarity on the expected impact of tariffs on inflation. Financial markets have priced in nearly a 60% possibility of a 25 basis points (bps) September rate cut.
On Tuesday, US President Donald Trump announced a trade deal with Japan, which includes a 15% tariff on imported goods, while Japan will invest $550 billion into the US. US Treasury Secretary Scott Bessent is set to meet with Chinese officials in Stockholm next week to discuss extending the deadline for trade negotiations. Tariffs might return to 145% on the US side and 125% on the Chinese side in the absence of a trade deal or discussion extension.
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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