US Dollar Index recovers some lost ground above 98.00 despite ongoing US government shutdown
- US Dollar Index rebounds to near 98.05 on Monday’s Asian session.
- Concerns over the ongoing US government shutdown weigh on the DXY.
- Fed's Miran stated the central bank has room for more cuts.
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 positive note around 98.05 during the Asian session on Monday. The potential upside for the DXY might be limited due to uncertainty and expectations of future interest rate cuts by the US Federal Reserve (Fed).
Uncertainty surrounding a US government shutdown undermines the DXY against its rivals. The US government shutdown entered its fifth day as US Senators failed to pass spending proposals to reopen the federal government. Later on Sunday, US President Donald Trump said that his administration would begin laying off federal workers. The US September employment report was due for release on Friday, but was not published due to the government shutdown.
Growing expectations of additional Fed rate cuts also drag the US Dollar lower. Traders are currently priced in an additional 25 basis points (bps) cuts in both October and December, with a chance of 95% and 83%, respectively, according to the CME FedWatch tool.
Fed Governor Stephen Miran said on Friday that he supported an aggressive path of rate cuts, citing the impact of the US President Donald Trump administration policies on the economy. Meanwhile, Dallas Fed President Lorie Logan remained hawkish, saying that the central bank really needs to be cautious of further rate cuts in an environment where things like non-housing services inflation remain “worrisome."
The minutes from the Federal Open Market Committee's (FOMC) September monetary policy meeting will be closely watched later on Wednesday. Any cautious tone from Fed officials could lift the USD 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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