US Dollar Index softens below 98.00 as tariff uncertainty weighs
- US Dollar Index trades on a softer note around 97.85 in Wednesday’s Asian session.
- Trump pushed ahead with fresh tariffs on trading partners despite a Supreme Court strike-down.
- Fed officials do not see an imminent need to change monetary policy.
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 weaker note near 97.85 during the Asian trading hours on Wednesday. Traders will take more cues from the speeches from the Federal Reserve’s (Fed) Jeff Schmid and Alberto Musalem later on Wednesday.
US President Donald Trump has threatened to impose higher tariffs on countries that "play games" with recent trade deals after the Supreme Court blocked many of the sweeping global levies. Trump imposed a new 10% global tariff on Saturday, which he quickly threatened to raise to 15%. US tariff uncertainty and fears of a renewed trade war could exert some selling pressure on the US Dollar against its rivals.
Boston Fed President Susan Collins stated on Tuesday that it will be appropriate to hold in the current range for some time, per Reuters. Meanwhile, Richmond Fed Thomas Barkin said that monetary policy is “well-positioned” to deal with the risks around the economic outlook. Hawkish rhetoric from Fed policymakers could lift the DXY as officials push back against imminent rate cuts.
The attention will shift to the US January Producer Price Index (PPI) report, which will be published later on Friday. Economists anticipate a moderation in PPI inflation in January compared to the previous month. However, if the report shows hotter-than-expected outcomes, this could underpin the DXY 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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