US Dollar Index holds steady below 98.00 ahead of US CPI data
- US Dollar Index trades flat near 97.85 in Thursday’s Asian session.
- US annual PPI inflation came in softer than expected, supporting the case for a Fed rate cut.
- Traders await the US August CPI inflation data, which is due later on Thursday.
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 97.85 during the Asian session on Thursday. Traders brace for the US Consumer Price Index (CPI) for August later on Thursday for fresh impetus.
An unexpected decline in the US Producer Price Index (PPI) bolstered expectations that the US Federal Reserve (Fed) will cut rates next week, which might weigh on the DXY. The US PPI declined by 0.1% MoM in August, compared to the 0.7% increase (revised from 0.9%) in the previous reading, the US Bureau of Labor Statistics (BLS) showed Wednesday. This figure came in below the market consensus of a 0.3% rise. On an annual basis, the US PPI rose 2.6% in August, versus a rise of 3.3% in July.
Meanwhile, the core PPI, which excludes food and energy prices, declined by 0.1% on a monthly basis in August. The core PPI rose 2.8% on a yearly basis after rising 3.7% in July and missing analysts' estimate of 3.5% by a wide margin.
Financial markets are now fully pricing in a 25 basis points (bps) rate cut at the Fed's September meeting, while the possibility of a larger 50 bps reduction has also risen to nearly 12%, according to the CME FedWatch tool.
The US August CPI inflation report will be closely watched later on Thursday. This report could offer some hints about the US interest rate path. If the report shows a hotter-than-expected inflation, this might boost the Greenback 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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