US Dollar Index holds below 98.00 as weak jobs data firm Fed rate cut likelihood
- US Dollar Index could face challenges amid rising odds of rate cuts by the US Federal Reserve.
- CME FedWatch tool suggests a pricing of 92% of a 25-basis-point Fed rate cut in September, following the August jobs data.
- Fed’s Goolsbee remains uncertain if September is the appropriate time for an interest rate cut given ongoing inflation pressures.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is edging higher after registering more than 0.5% losses in the previous session and trading around 97.90 during the Asian hours on Monday.
The Greenback faced challenges amid rising United States (US) Federal Reserve (Fed) rate cut bets, following weaker-than-expected jobs data for August. The CME FedWatch tool indicates a pricing in 92% of a 25-basis-point (bps) rate cut by the Fed at the September policy meeting, up from 86% a week ago, with bets rising on a potential 50 bps reduction this month.
US Bureau of Labor Statistics (BLS) reported on Friday that the US Nonfarm Payrolls (NFP) rose by 22,000 in August, falling short of the market expectations of 75,000. This figure followed the 79,000 increase (revised from 73,000) recorded in July. Meanwhile, the Unemployment Rate increased to 4.3% August, as expected, against the 4.2% prior.
Federal Reserve (Fed) Bank of Chicago President Austan Goolsbee said in an interview on Bloomberg TV on Friday that sinking employment data is typically a cause for interest rate cuts. Goolsbee added that he is still unsure whether September is the right timing for an interest rate cut, as high inflation data is still cause for concern.
US President Donald Trump said on Sunday that European leaders would visit the United States (US) on Monday or Tuesday to discuss how to resolve the Russia-Ukraine war. Trump added that he was "not happy" about the status of the Russia-Ukraine war, after reporters asked about a massive Russian air assault overnight on Sunday, per Reuters.
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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