United States Dollar Index softens below 99.00 on US fiscal concerns
- US Dollar Index weakens to around 98.80 in Monday’s Asian session.
- Treasury bond buybacks raise concerns over the deteriorating fiscal outlook.
- Bessent said he will hold a press conference on Monday to explain fresh US sanctions against Iran.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, currently trades near 98.80 in the Asian trading hours on Monday. The DXY declines to near three-month lows as a market unsettled by the US Treasury's promise to buy back more long bonds.
US Treasury Secretary Scott Bessent said on Thursday that it would double its long-end bond buybacks to $4 billion per operation to cap surging 30-year yields. The announcement came one day after the department surprised markets by pledging to at least double the size of its buybacks of longer-dated debt in an effort to rein in bond yields.
"Bessent’s efforts to suppress U.S. yields haven't done much for U.S. yields, but it's undermined the dollar," said Marc Chandler, chief market strategist at Bannockburn Global Forex. "The market is pushing back,” Chandler added.
Recent US inflation data show signs of easing, though some Federal Reserve (Fed) officials said they would need to see more evidence that price pressures were receding. Markets are now pricing a 41.0% chance of a Fed rate hike at the upcoming policy meeting, down from 47% a month earlier, according to the CME FedWatch Tool.
Later on Monday, Scott Bessent is scheduled to hold a press conference after threatening "the toughest sanctions in history" on Iran, with traders focused on whether he will target China.
Last week, US President Donald Trump announced the most severe economic action ever taken against Iran, saying this will be economic conflict and isolation on an unprecedented scale and the countries allowing financial aid to Iran will face severe economic consequences. Rising tensions in the Middle East could boost a safe-haven currency such as the USD against its rivals in the near term.
Dollar seen bearing brunt of US fiscal worries as yields capped
Strategists at Scotiabank argue that the current policy mix leaves the currency particularly exposed to fiscal concerns. With authorities aiming to keep long-dated borrowing costs in check, they note that “efforts to suppress long-term yields means that the USD will bear a greater—negative—burden from US fiscal policy concerns,” reinforcing their view that the Dollar is likely to remain under pressure as fiscal uncertainty persists.
Fed's Musalem flags upside inflation risks, keeps Dollar bulls alert despite neutral stance
Fed's Musalem delivers a speech that aligns with the 7/10 FXS Speechtracker score, broadly in line relative to the historical average, but with a subtly more hawkish tilt beneath an ostensibly neutral policy description. By stating that monetary policy is “neutral or accommodative” while warning that underlying inflation is stuck around 2.5%-3%, that current rates carry a lower probability of reaching 2%, and that hiking now could avert more aggressive action later, the remarks lean toward pre-emptive tightening despite acknowledging strong growth, accommodative financial conditions, and potential supply shocks like a Super El Nino. The emphasis on preserving Fed credibility, keeping monetary policy independent of fiscal policy, and focusing on core inflation under supply shocks reinforces a price-stability-first narrative that is modestly supportive for the Dollar and U.S. yields.
The FXS Fed Sentiment Index slipped by 0.34 points to 132.42, signaling a minor pullback in perceived hawkishness even as the index remains firmly above the 100 neutral line. This configuration suggests that, while the immediate tone is slightly less hawkish than recent communications, the broader policy backdrop stays in hawkish territory, consistent with a 7/10 FXS Speechtracker score and a Fed still biased toward further tightening if inflation fails to move convincingly back to 2%.
Technical Analysis: US Dollar Index remains capped below the 100-day SMA
In the daily chart, Dollar Index Spot maintains a bearish near-term bias as it sits below the 100-day moving average and the Bollinger middle band. Price is pressing into the lower half of the recent range, while the Relative Strength Index (14) near 30 suggests the index is approaching oversold territory, hinting that downside momentum is stretched but still dominant as long as it remains capped beneath these overhead averages.
On the topside, initial resistance aligns at the 100-day moving average near 99.70, followed closely by the Bollinger 20-period simple moving average at 99.75, forming a tight supply zone before the upper Bollinger band at 101.00. On the downside, the immediate cushion is the lower Bollinger band at 98.50, where a clear break would open the door to a continuation of the downtrend, while a bounce from this area would likely see the index retesting the clustered resistance just above 99.50.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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