US Dollar Index loses ground to near 98.50, US PPI data in spotlight
- The US Dollar Index weakens to around 98.55 in Wednesday’s Asian session.
- Trump said drug tariffs will probably be imposed by August 1.
- Investors trimmed rate cut bets by the Fed after hot US inflation data.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, loses traction to 98.55 during the Asian trading hours on Wednesday. Investors brace for the release of the US Producer Price Index (PPI), Fed Beige Book and Industrial Production, which are due later on Wednesday.
The US Dollar edges lower, snapping the four-day winning streak as markets continue to assess the impact of US President Donald Trump's tariff policy while awaiting new developments. Trump said late Tuesday that he was likely to impose tariffs on pharmaceuticals as soon as the end of the month and that levies on semiconductors could come soon as well. Nonetheless, any signs of renewed trade tensions between the US and its major trading partners could undermine the USD against its rivals in the near term.
Federal Reserve (Fed) Bank of Boston President Susan Collins said on Tuesday that it is challenging to set monetary policy right now amid uncertainty, adding that it's time for the US central bank to be 'actively patient' with monetary policy. Meanwhile, Dallas Fed President Lorie Logan stated that the Fed will probably need to leave interest rates where they are for a while longer to ensure inflation stays low in the face of upward pressure from the US Trump administration's tariffs.
Data released by the US Bureau of Labor Statistics (BLS) on Tuesday showed that the US Consumer Price Index (CPI) rose by 2.7% YoY in June, up from 2.4% in May. This figure came in line with the market forecast. The core CPI, excluding fluctuating food and energy costs, increased by 2.9% in the same month versus 2.8% prior. On a monthly basis, the headline CPI and core CPI rose by 0.3% and 0.2%, respectively.
The hot US CPI inflation data and the cautious stance of the Fed lift the Greenback as investors pared back expectations of Fed interest rate cuts this year. Traders have priced in nearly 43 basis points (bps) worth of reductions by December, down from above 50 bps at the start of the week.
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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