US Dollar Index hovers around 97.00 ahead of CPI data
- US Dollar Index remains calm as traders adopt caution ahead of the US January CPI data.
- US headline and core inflation are expected to ease to 2.5%.
- Fed’s Miran said policy has passively tightened, leaving room for lower interest rates.
The IEA projects a 3.7 million bpd surplus in 2026 and cut its global Oil demand forecast.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, remains in the positive territory for the third successive session and is trading near 97.00 during the Asian hours on Friday.
Investors are now focused on the January Consumer Price Index (CPI) report from the United States. Headline inflation is forecast to ease to 2.5% from 2.7%, while core inflation is expected to slow to 2.5% from 2.6%. A softer print could give the Federal Reserve room to resume rate cuts after holding steady at its first meeting of the year.
Markets are currently pricing in two Fed rate cuts in 2026, with the first likely in the second half of the year following stronger-than-expected January employment data. Still, uncertainty persists over potential adjustments to the Fed’s balance sheet ahead of Kevin Warsh’s anticipated appointment as Chair in May. Warsh has previously criticized asset purchases but recently signaled he may support coordination with the Treasury to help lower yields.
Fed Governor Stephan Miran said on Friday that monetary policy has effectively tightened on its own, suggesting there is scope for lower interest rates. Miran added that inflation, once adjusted for distortions, is close to target and that some slack remains in the labor market, leaving room for policy support.
The CME FedWatch tool suggests that financial markets are now pricing in nearly a 91% probability that the Fed will leave rates unchanged at its next meeting, up from 77% the previous week.
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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