US Dollar Index (DXY) returns above 98.00 as investors digest the Middle East truce
- The Dollar trims previous losses as the optimism about the Middle East ceasefire eases.
- Fed Chairman Powell maintained a cautious stance towards interest rate cuts in his testimony to Congress.
- A downbeat Consumer Confidence survey undermined confidence in Powell's hawkish stance.
The US Dollar is trading with minor gains on Wednesday, trimming losses after a nearly 1.30% decline on the previous two days. Markets have turned more cautious as the enthusiasm about the ceasefire in the Middle East ebbs, although Investors’ hopes that the Fed will cut rates over the next months are limiting upside attempts.
The ceasefire between Israel and Iran holds for the second day, and that is keeping a moderate appetite for risk, but a US intelligence report stating that the attacks had only delayed Iran’s nuclear program for a few months casts doubt on a long-lasting peace.
Fed Powell fails to curb rate cut expectations
On Tuesday, Fed Chairman Jerome Powell resisted President Trump's calls for a rate cut and the divergence within the central bank’s monetary policy committee, and confirmed that the central bank is not rushing to cut rates.
Powell reiterated that the bank was well-positioned to react to a highly likely increase in prices when the impact of Trump’s tariffs filters through the US economy, to weigh on economic activity.
Macroeconomic data, however, revealed that the economy is already losing steam. The Conference Board’s Consumer Confidence deteriorated against expectations in June, with consumers wary about the labour market.
These figures come after a string of downbeat macroeconomic releases over the last two weeks, which are feeding market expectations that the bank will cut rates twice this year. Futures markets are increasingly pricing a 25 bps cut in September and another one in December, and this is keeping US Dollar’s upside attempts limited.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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