US Dollar Index holds steady above 98.50, Jackson Hole Symposium in focus
- US Dollar Index trades flat near 98.65 in Friday’s Asian session.
- US Composite PMI improved in August, led by a resurgent manufacturing sector.
- Fed Chair Jerome Powell’s speech will be the highlight later on Friday.
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 around 98.65 during the early Asian trading hours on Friday. Traders await the Federal Reserve (Fed) Chair Jerome Powell’s speech later on Friday, with traders paring back wagers on an imminent interest-rate cut.
Data released by S&P Global on Thursday showed that the US Composite PMI climbed to 55.4 in August, versus 55.1 prior. Meanwhile, the US Manufacturing PMI rose to 53.3 in August from 49.8 in July. This figure came in stronger than the expectation of 49.5. Finally, the Services PMI declined to 55.4 in August from 55.7 in the previous reading but was stronger than the 54.2 expected.
Chicago Fed President Austan Goolsbee said late Thursday that September’s Fed meeting remains open for action. Goolsbee added that the US central bank has been getting mixed messages on the economy, and the Fed still has time to take more data. Cleveland Fed President Beth Hammack noted that it’s important to maintain a modestly restrictive policy to lower inflation, adding that he does not see an imminent case for cutting rates based on current data.
Stronger US economic data and a more hawkish tone from Fed officials could provide some support to the DXY. Markets are now pricing in nearly a 70% chance of a September rate cut, down from 90% a week ago, according to the CME FedWatch tool.
The attention will shift to the Fed’s annual Jackson Hole symposium later on Friday for clues on the policy outlook. Analysts expect that the dovish shift from Powell's remarks could weigh on the US Dollar 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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