US Dollar Index holds losses near 98.50 ahead of Michigan Consumer Sentiment
- US Dollar Index edged lower as markets expect the Fed to start policy easing in September.
- San Francisco Fed President Mary Daly noted that expecting two rate cuts this year is a "reasonable" outlook.
- US Retail Sales rose by 0.6% MoM, while Retail Sales climbed 3.9% YoY in June.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is retracing its recent gains from the previous session and hovering around 98.50 during the Asian hours on Friday. Traders will likely observe the University of Michigan Consumer Sentiment, Building Permits, and Housing Starts later in the day.
The Greenback loses ground amid easing risk aversion following the dovish remarks from Federal Reserve (Fed) officials. Moreover, Financial markets are now pricing in a September starting date for Fed rate cuts, according to Reuters.
On Thursday, San Francisco Fed President Mary Daly called two rate cuts this year a "reasonable" outlook, while warning against waiting too long. Daly also added that rates will eventually settle at 3% or higher, which is higher than the pre-pandemic neutral rate.
Meanwhile, Fed Governor Christopher Waller said the Fed should cut interest rates 25 basis points at the July meeting. Waller also noted that rising risks to the economy favor easing the policy rate. If underlying inflation remains in check and growth tepid, more cuts are needed, he added.
However, FOMC Governor Adriana Kugler noted that it is appropriate to keep the policy rate of interest steady “for some time,” given low unemployment and building price pressure from tariffs. Kugler highlighted that inflation remains above the 2% target, and the labor market is stable and resilient.
However, the upbeat economic data from the United States (US) has trimmed the odds of the Federal Reserve (Fed) easing monetary policy. US Retail Sales rose by 0.6% month-over-month in June versus -0.9% prior. This figure came in above the market consensus of 0.1%. Meanwhile, the annual Retail Sales climbed 3.9%, compared to a rise of 3.3% in May. Moreover, Initial Jobless Claims for the week ending July 12 fell to 221K from 228K, and came in below the expected 235K.
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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