US Dollar Index hovers around 99.50, downside appear amid dovish Fed stance
- US Dollar Index may lose ground amid growing odds of a Fed rate cut in December.
- CME FedWatch Tool suggests pricing in an 87% chance of a 25-basis-point rate cut in December.
- Safe-haven demand softened amid ongoing discussions on a potential Ukraine-Russia peace deal.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is holding ground after three days of losses and trading around 99.60 during the Asian hours on Friday. However, the US Dollar (USD) could further lose amid rising odds of Federal Reserve (Fed) rate cut bets in December.
Traders are also anticipating three additional rate cuts by the end of 2026 after reports indicated that White House National Economic Council Director Kevin Hassett is the leading candidate for the next Fed chair. Traders see Hassett as aligned with US President Donald Trump’s preference for lower interest rates.
The CME FedWatch Tool suggests that markets are now pricing in a more than 87% chance that the Fed will cut its benchmark overnight borrowing rate by 25 basis points (bps) at its December meeting, up from the 39% probability that markets priced a week ago.
The US Department of Labor (DOL) reported on Wednesday that Initial Jobless Claims fell to 216,000 for the week ending November 22, down 6,000 from the previous week’s revised figure. The result was stronger than the market expectation of 225,000. Meanwhile, the 4-week moving average eased by 1,000 to 223,750.
Safe-haven demand for the Greenback also eased amid ongoing talks over a potential Ukraine-Russia peace deal. Russian President Vladimir Putin indicated that proposals from US President Donald Trump could help shape future agreements and expressed readiness for further negotiations. Ukrainian President Volodymyr Zelenskiy noted that Ukrainian and US delegations will meet this week to refine a framework discussed in Geneva.
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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