US Dollar Index extends upside above 97.50 as traders brace for Fedspeak
- US Dollar Index trades in positive territory around 97.80 in Monday’s Asian session.
- Fed lowered its benchmark interest rate by 25 bps at its September meeting.
- The speeches from Fed officials will be closely watched later on Monday.
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 stronger note near 97.80 during the Asian trading hours on Monday. The DXY extends the rally as traders brace for a slew of speeches from Federal Reserve (Fed) officials throughout the week that could provide further clues on the US rate outlook.
The Fed cut its first interest rate cut of the year, lowering the Federal Funds Rate by 25 basis points (bps) to the new target range of 4.00% to 4.25%. Fed Chair Jerome Powell stated during the press conference that the decision was a "risk management cut" intended to address a weakening labor market while inflation remains somewhat elevated. The DXY received some support on less-than-expected dovish remarks from the Fed officials.
Fed Governor Stephen Miran, who voted against the quarter-percentage-point reduction in favor of a steeper 50 bps rate cut at September's policy meeting, said he made his decision independently and was not pressured on how to vote. Miran promised to give a detailed argument for his views in a speech later on Monday.
Traders will keep an eye on the Fedspeak later in the day, as it could move the currency markets. Renewed concerns over the Fed’s independence might cap the upside for the US Dollar.
"The one that I think would be most interesting for markets is the speech from Stephen Miran, because markets would want to get a gauge about what he thinks about independence of the Fed and what influence the President might have and the like," said Joseph Capurso, head of FX, international and geoeconomics at Commonwealth Bank of Australia.
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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