US Dollar Index holds positive ground near 98.50 ahead of US PMI data
- US Dollar Index attracts some buyers to near 98.40 in Thursday’s early European session.
- Rates futures traders are pricing in an 80% probability of a quarter-point cut in the September meeting.
- Fed officials acknowledged worries over higher inflation and weaker employment, according to the FOMC minutes.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, gains traction to around 98.40 during the early European session on Thursday. Traders brace for the preliminary reading of the US S&P Global Purchasing Managers Index (PMI) for August later on Thursday, ahead of the Federal Reserve’s (Fed) annual Jackson Hole symposium.
The DXY hovers around a one-week high as traders reduce bets on a rate cut at the Fed's September meeting after hotter-than-expected July Producer Price Index (PPI) data. Traders are currently pricing in nearly an 80% chance for a quarter-point Fed rate cut on September 17 and price in a total of 52 basis points (bps) of reductions over the rest of the year, according to the CME FedWatch tool. On Wednesday, the chance for a cut next month stood at 83%.
The minutes from the Fed’s July 29-30 meeting showed that policymakers remain more concerned about inflation risks than the labor market, with tariffs deepening divisions within the committee. The US central bank left interest rates unchanged in a range of 4.25% to 4.5% last month, citing elevated uncertainty in its outlook.
Fed Governors Christopher Waller and Michelle Bowman dissented from the majority opinion, arguing for a 25 basis points (bps) rate cut. That is the first time since 1993 that two members of the Board of Governors have broken ranks with the committee.
Fed Chair Jerome Powell will deliver a closely watched speech in Jackson Hole, Wyoming, later on Friday. His remarks in recent months have leaned to the hawkish side, but those were all before the release of the weak July employment report. Any surprise dovish comments from Powell could undermine the US Dollar against its rivals in the near term.
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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