US Dollar Index treads water above 98.00 ahead of ISM Services PMI
- The US Dollar Index holds ground ahead of key economic data from the United States.
- Traders await the ADP Employment Change, weekly Jobless Claims, and ISM Services Purchasing Managers’ Index due on Thursday.
- CME FedWatch tool indicates pricing in more than 99% of a 25-basis-point Fed rate cut in September.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is holding ground after registering losses in the previous session and trading around 98.20 during the Asian hours on Thursday.
The Greenback appreciates ahead of fresh labor market data that could shape the interest rate outlook. Traders await the ADP Employment Change, forecast to indicate slower hiring, along with weekly Jobless Claims expected to rise modestly. ISM Services Purchasing Managers’ Index (PMI) will also be eyed.
Attention will be shifted toward Friday’s data that could shape the US Federal Reserve’s (Fed) policy decision in September. Economists project US Nonfarm Payrolls to add about 75,000 jobs in August, while the Unemployment Rate is seen at 4.3%.
The US Dollar (USD) may lose ground as weaker-than-expected July JOLTS Job Openings boosted the odds of the Federal Reserve (Fed) rate cut in September. Job openings declined to 7.18 million from 7.35 million, marking the weakest level since September 2024 and missing forecasts of 7.4 million. The CME FedWatch tool indicates pricing in more than 99% of a 25-basis-point (bps) rate cut by the Fed at the September policy meeting, up from a 92% chance a day ago.
However, Minneapolis Fed President Neel Kashkari flashed another policy warning sign on Wednesday, cautioning that tariffs are pushing the consumer-facing costs of goods higher, resulting in climbing inflation figures. Kashkari also cautioned that the US economy is pivoting harder into a "soft landing" scenario.
Meanwhile, Atlanta Fed President Raphael Bostic said that high inflation remained the Fed’s main risk, but added that signs of labour market weakness still pointed to a single quarter-point rate cut this year.
Stephen Miran, the US Council of Economic Advisors (CEA) member, nominated by US President Donald Trump to fill a recently vacated seat on the Fed’s Board of Governors, pledged to uphold the Federal Reserve’s political independence if confirmed by Congress. Miran stated that his opinions as a Fed Governor would be based on "his analysis", which has resulted in odd publications in the past.
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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