US Dollar Index flat lines above 99.00 on hope for compromise in US-China trade war
- US Dollar Index trades flat around 99.25 in Tuesday’s early Asian session.
- Hope for a compromise in US-China trade war supports the US Dollar.
- Dovish comments from Fed policymakers and the US government shutdown might cap the upside for the DXY.
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 near 99.25 during the early Asian session on Tuesday. The DXY holds steady as US President Donald Trump's watered-down rhetoric against tariffs on China. The Federal Reserve’s (Fed) Chair Jerome Powell speech will be in the spotlight later on Tuesday.
On Friday, Trump threatened China with 100% tariffs beginning on November 1. However, he tempered his tone on Sunday, saying, "Don't worry about China, it will all be fine.” US Treasury Secretary Scott Bessent stated on Monday that Trump remains on track to meet Chinese leader Xi Jinping in South Korea in late October.
A potential meeting with his Chinese counterpart raised hopes of de-escalation in trade tensions between the world’s two largest economies. This, in turn, could provide some support to the Greenback.
On the other hand, dovish remarks from the Federal Reserve (Fed) officials might cap the upside for the US Dollar. Philadelphia Fed Anna Paulson said on Monday that she anticipates more interest rate cuts to support the job market, as trade tariffs now appear unlikely to push up inflation as much as expected.
Markets are currently pricing in an almost certain 25 basis points (bps) rate cut at the Fed’s October meeting, with another reduction expected in December, according to the CME FedWatch tool.
The US government shutdown has entered its third week with no resolution in sight. The Senate returns Tuesday and is expected to vote again on a House-passed measure to fund the government. A prolonged US federal shutdown could raise concerns over the impact on the US economy, which could exert some selling pressure on the DXY.
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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