US Dollar Index slips below 99.00 due to rising odds of further Fed rate cuts
- US Dollar Index extends its losses due to the dovish tone surrounding the Fed policy stance.
- CME FedWatch shows markets pricing nearly a 96% chance of an October Fed cut and 95% in December.
- Trump warned of new trade restrictions if China enforces rare earth export controls and higher port fees.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is extending its losses for the second successive session and trading around 98.80 during the European hours on Wednesday.
The Greenback faced challenges due to the increased likelihood of further rate cuts by the Federal Reserve (Fed) in 2025. CME FedWatch Tool indicates that markets are now pricing in nearly a 96% chance of a Fed rate cut in October and a 95% possibility of another reduction in December.
Additionally, the dovish sentiment surrounding the US Federal Reserve (Fed) policy outlook put downward pressure on the USD. Fed Chair Jerome Powell stated that the central bank is on track to deliver another quarter-point interest-rate reduction later this month, even as a government shutdown significantly reduces its read on the economy. Powell highlighted the low pace of hiring and noted that it may weaken further.
Meanwhile, Boston Fed President Susan Collins claimed that the policy is not on a preset path; some scenarios would keep rates steady, and that policy would remain restrictive even with more easing.
The US Dollar also draws downward pressure as traders adopt caution amid renewed trade tensions between the United States (US) and China, the world's two largest economies. US President Donald Trump criticized China on Wednesday for its recent protectionist trade policies, threatening additional targeted trade restrictions if China proceeds with imposing new rare earth mineral export controls and increased port fees for foreign container ships in Chinese ports.
The US and China decided to charge additional port fees on ocean shipping companies that transport everything from holiday toys to crude Oil. The US is scheduled to start collecting fees on Tuesday. China also started to collect the special taxes on US-owned, operated, built, or flagged vessels, but stated that Chinese-built ships would be exempted from the levies.
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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