US Dollar Index strives to gain ground near 97.30 ahead of US NFP benchmark revision data
- The US Dollar Index posts a fresh six-week low near 97.30 on Tuesday.
- Investors await the key US NFP benchmark revision report for the year ending March 2025.
- Analysts at Standard Chartered Bank see the Fed reducing interest rates by 50 bps next week.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, strives for a firm footing during the European session on Tuesday after posting a fresh six-week low near 97.30 earlier in the day.
Faltering United States (US) labor market conditions in the wake of tariffs imposed by President Donald Trump since his return to the White House. The US Nonfarm Payrolls (NFP) report for August showed on Friday that the labor demand has slowed down further, with employers adding fewer fresh workers. In August, the US economy added 22K fresh workers, the worst reading seen since January 2021.
Weakening US job market have led to a sharp increase in bets supporting interest rate cuts by the Federal Reserve (Fed) in the policy meeting next week.
According to the CME FedWatch tool, traders see an 11.6% chance that the Fed will cut interest rates by 50 basis points (bps) to 3.75%-4.00%, while the rest point a standard 25-bps interest rate reduction.
Analysts at Standard Chartered Bank have also raised expectations for the pace of interest rate cuts by the Fed in next week’s policy meeting to 50 bps, from 25 bps projected earlier, stating that the labor market had become “soft from being solid in less than six weeks".
In Tuesday’s session, investors will pay close attention to the NFP benchmark revision report for employment data through March 2025. The impact of the employment revision report will be significant on market expectations for the Fed’s monetary policy outlook.
In 2024, the Fed delivered a 50-bps interest rate cut in September after the payrolls revision report showed that the economy created 818K fewer jobs than had been anticipated earlier.
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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