US Dollar Index flat lines above 99.00 ahead of Fed rate decision
- US Dollar Index holds steady around 99.20 in Wednesday’s Asian session.
- The Fed rate decision will take center stage on Wednesday, with a 25 bps rate cut widely anticipated.
- Markets expect Kevin Hassett to be named the next Fed Chair.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, trades on a flat note near 99.20 during the Asian trading hours on Wednesday. Traders prefer to wait on the sidelines ahead of a key US Federal Reserve (Fed) policy decision later on Wednesday.
The US Labor Department’s JOLTS report showed on Tuesday that job openings rose to 7.67 million in October, beating forecasts of 7.20 million. This report indicated a strong labor market, which could weigh on rate cut expectations and lift the DXY. Traders are currently pricing in nearly an 87.4% probability of a 25 basis points (bps) rate reduction at the December meeting, declining by 2% after the latest stronger jobs report.
Traders will also closely monitor Fed Chair Jerome Powell's press conference after the policy meeting. Analysts believe Powell will likely suggest a higher bar for future rate cuts, possibly hinting at a pause after this move. “The likeliest outcome is a kind of hawkish cut where they cut, but the statement and the press conference suggesting that they may be done cutting for now,” said Bill English, the Fed’s former director of monetary affairs and now a Yale professor.
On the other hand, the prospect of White House economic adviser Kevin Hassett taking over as Fed Chair might cap the upside for the US Dollar. US President Donald Trump said that he plans to announce his choice to succeed Jerome Powell as head of the Fed early next year. Kevin Hassett has emerged as the frontrunner to be the next Fed chair, which might drag the USD lower, as analysts believe that Hassett is expected to push for more rate cuts.
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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