US Dollar Index tumbles to near 97.50 as Trump considers candidates to replace Powell
- The US Dollar Index slumps to multi-year lows around 97.60 in Thursday’s Asian session.
- Trump renews attack on Powell, considering naming the next Fed Chair.
- Traders brace for the final US Q1 GDP Growth Rate report, which is due later on Thursday.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, tumbles to a fresh three-and-a-half-year low near 97.60 during the early European session on Thursday. The concerns of Federal Reserve (Fed) independence and credibility weigh on the Greenback.
According to a Wall Street Journal report, US President Donald Trump is considering selecting and announcing a successor for Federal Reserve (Fed) Chair Jerome Powell by September or October. The sources said Trump might consider former Fed Governor Kevin Warsh and National Economic Council Director Kevin Hassett as well as Treasury Secretary Scott Bessent.
"The move would raise questions about the potential erosion of Fed independence and potentially weaken credibility," said Kieran Williams, head of Asia FX at InTouch Capital Markets. "If this was the case it could recalibrate rate expectations, trigger reassessment of dollar positioning,” he added.
Fed Chair Jerome Powell said on Wednesday that Trump's tariff policies may well just cause a one-time jump in prices, but the risk that they could cause more persistent inflation is large enough for the Fed to be careful in considering further rate cuts. Financial markets have priced in nearly a 25% odds that the Fed will deliver a rate cut in the July meeting, up from 12% a week ago, according to the CME FedWatch tool.
Traders await the US economic data due later on Thursday for fresh impetus. The final US Q1 Gross Domestic Product (GDP) Growth Rate will be released, followed by Durable Goods Orders, the Chicago PMI, Pending Home Sales, and the weekly Initial Jobless Claims. If the reports show a stronger-than-expected outcome, this could help limit the USD’s losses 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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