US Dollar Index remains below 98.00 due to looming government shutdown
- US Dollar Index struggles due to market caution amid the looming government shutdown.
- The possible government shutdown may delay the upcoming US jobs report this week.
- President Trump has warned that failure by Congress to pass a funding bill could lead to widespread federal job cuts.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is remaining subdued for the third successive session and trading around 97.90 during the Asian hours on Tuesday.
The Greenback faces challenges as traders adopt caution due to concerns that the upcoming US jobs report may not be released this week, with the government nearing a funding freeze and possible shutdown. Traders await the September Nonfarm Payrolls report for insights into the labor market, alongside data on job openings, private payrolls, and the ISM manufacturing PMI.
US President Donald Trump has warned of mass federal job cuts if Congress fails to pass a funding bill, effectively putting his own government at risk and threatening further disruptions to federal operations.
Reuters cited the White House saying that President Trump signed a proclamation on Monday imposing a 10% tariff on lumber imports and a 25% tariff on vanities, kitchen cabinets, and upholstered wooden products. The proclamation states that the tariffs will take effect on October 14."
The US August inflation report boosted the likelihood that the US Federal Reserve (Fed) will likely deliver another interest rate cut in October. Markets are now pricing in nearly a 90% chance of a Fed rate cut in October and a 70% possibility of another reduction in December, according to the CME FedWatch Tool.
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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