US Dollar Index holds steady below 98.00 on Fed dovish tone
- US Dollar Index flat lines around 97.85 in Monday’s early Asian session.
- Ukrainian President Zelenskiy faces US pressure to reach a peace deal with Russia that involves ceding territory.
- US Retail Sales came in line with expectations in July.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, trades on a flat note near 97.85 during the Asian trading hours on Monday. Traders prefer to wait on the sidelines ahead of a crucial meeting between US President Donald Trump and Ukrainian leader Volodymyr Zelenskiy later on Monday. The Federal Reserve's (Fed) Jackson Hole symposium will take center stage later on Friday.
US President Donald Trump said after his talks with Russian President Vladimir Putin in Alaska on Friday that he will urge Zelenskiy to make a quick deal and sounded receptive to Putin’s demand that Ukraine give up large swathes of land, per Bloomberg. Ukrainian leader facing US pressure to reach a peace deal with Russia that involves ceding territory. Traders will closely watch the developments surrounding Trump-Zelenskiy talks. Any signs of escalating tensions could boost the safe-haven flows, supporting the US Dollar against its rivals.
Data released by the US Census Bureau on Friday revealed that the US Retail Sales increased by 0.5% MoM in July, versus a rise of 0.9% recorded in June (revised from 0.6%). This reading came in line with the market consensus. On an annual basis, Retail Sales rose 3.9% in July, compared to 4.4%, matching the expectations.
Meanwhile, the Consumer Expectations Index eased to 57.2 in August from 57.7 in July, highlighting some change of view regarding the months ahead. The one-year inflation expectations ticked up to 4.9% from 4.5%, and the five-year forecast increased to 3.9% from 3.4%.
These US economic reports have kept the case for a September Fed interest rate cut intact, which might weigh on the DXY in the near term. Money markets are now pricing in nearly a 93% possibility of a 25 basis points (bps) Fed rate cut in September, according to the CME FedWatch tool. However, there are some misgivings about what happens from there, with a 55% chance of another reduction in October and just a 43% probability of a third move in December.
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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