US Dollar Index falls further to near 97.20 as Fed sets to cut interest rates
- The US Dollar Index slides to near 97.20 as an interest rate cut from the Fed on Wednesday seems a done deal.
- Market experts believe that the Fed will deliver two more interest rate cuts this year.
- Investors await key US Retail Sales data for August.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.1% lower to near 97.20 during the Asian trading session on Tuesday. This is the lowest level seen in three weeks.
The US Dollar (USD) continues to face selling pressure as the Federal Reserve (Fed) is widely anticipated to start the monetary-easing campaign in its policy announcement on Wednesday. According to the CME FedWatch tool, traders have fully priced in an interest rate cut by the Fed on Wednesday. Lower interest rates by the Fed bode poorly for the US Dollar.
Amid firm expectations that the Fed will bring interest rates down, investors will pay close attention to the monetary policy statement and Chair Jerome Powell’s press conference to get cues about the likely interest rate action in the remainder of the year.
Analysts at Deutsche Bank have anticipated that the Fed will cut interest rates by 25 basis points (bps) in each of the remaining three policy meetings this year, indicating that borrowing rates will go lower to 3.50%-3.75%.
On Monday, the United States (US) Senate narrowly confirmed President Donald Trump’s chosen economic adviser Stephen Miran as a member of the Fed’s Board of Governors ahead of the policy decision. Miran was placed in the replacement of Fed’s board after member Adriana Kugler unexpectedly resigned in early August.
Additionally, the independence of the Fed has been preserved for now by a US appeals court, as they ruled against Trump’s termination of Governor Lisa Cook over mortgage allegations. US assets fell sharply after Trump fired Cook, which market experts saw as an attack on the Fed’s independence.
In Tuesday’s session, investors will focus on the US Retail Sales data for August, which will be published at 12:30 GMT. The Retail Sales data is expected to have grown at a moderate pace of 0.3% on a monthly basis.
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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