US Dollar Index extends downside to near 97.00 as traders assess new trade deal
- The US Dollar Index softens to around 97.15 in Thursday’s early Asian session.
- Bessent said a new Fed Chairman nominee is likely to be announced in December or January.
- Investors await the US and China trade talks next week.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, extends the decline to around 97.15, the lowest since July 7, during the Asian trading hours on Thursday. Risk-on sentiment from the fresh US trade deal was offset by political uncertainty surrounding Japanese Prime Minister Shigeru Ishiba's future.
Concerns over the Federal Reserve (Fed) independence might weigh on the US Dollar (USD) in the near term, as US President Donald Trump has repeatedly railed against Chair Jerome Powell and urged him to resign because of the US central bank's reluctance to cut interest rates.
US Treasury Secretary Scott Bessent said on Thursday that the announcement of a new Federal Reserve (Fed) Chair nominee is expected to occur in December or January next year. Bessent stated that there's "no rush" to identify a successor to Fed Chair Powell, adding that a nominee could potentially come from current board members or the heads of the district banks.
Bessent stated that he will meet with Chinese officials in Stockholm next week to discuss an extension to the deadline for negotiating a trade deal. Investors remain cautious on how tariff deals will play out as the August 1 deadline still looms for many countries. Any signs of renewed trade tensions could exert some selling pressure on the Greenback.
Traders will focus on the preliminary reading of US Purchasing Managers Index (PMI) data for July, which is due later on Thursday. The Manufacturing PMI is expected to improve to 52.5 in July from 52.0, while the Services PMI is projected to rise to 53.0 in July versus 52.9 prior. In case of a stronger-than-expected outcome, this could help limit the USD’s losses. Additionally, the weekly US Initial Jobless Claims, New Home Sales, and the Chicago Fed National Activity Index will be released later in the same day.
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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