US Dollar Index (DXY) sticks to mild positive bias around mid-97.00s, lacks follow-through
- The USD trades with positive bias for the second straight day, though it lacks bullish conviction.
- Thursday's US macro data reinforced the view that the Fed will keep rates steady and lends support.
- Concerns about the Fed's independence cap gains as the focus shifts to the FOMC meeting next week.
The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, ticks higher for the second straight day on Friday, though it lacks bullish conviction. Moreover, the fundamental backdrop warrants some caution before positioning for an extension of the overnight bounce from a two-and-a-half-week low.
Data released on Thursday pointed to a still resilient US labor market. Adding to this, a first look at S&P Global's PMI revealed employment strength across both the manufacturing and services sectors, which, along with intensifying price pressures, suggests that inflation could accelerate in the second half of the year. This reinforces the market view that the Federal Reserve (Fed) will keep interest rates unchanged at the upcoming meeting next week and turns out to be a key factor acting as a tailwind for the US Dollar (USD).
Meanwhile, US President Donald Trump continued to dial up the pressure on Fed Chair Jerome Powell and expressed his desire for lower interest rates during a rare visit to the central bank's headquarters. Furthermore, investors remain worried that the Fed's independence could be under threat on the back of mounting political interference. This, along with concerns about the potential negative economic impact from higher import prices, is holding back the USD bulls from placing aggressive bets and capping any further gains.
Investors also seem reluctant and might opt to wait for more cues about the Fed's rate-cut path. Hence, the focus will remain glued to the outcome of a two-day FOMC monetary policy meeting, starting next Tuesday. In the meantime, Friday's release of US Durable Goods Orders might influence the USD price dynamics later during the North American session. Nevertheless, the DXY seems poised to register losses for the first time in three weeks, though the mixed fundamental backdrop warrants some caution.
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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