US Dollar Index hovers around 97.00 after losing recent gains, Initial Jobless Claims eyed
- US Dollar Index may regain its ground as a strong inflation outlook has curbed expectations of aggressive Fed rate cuts.
- Fed Chair Jerome Powell struck a cautious tone, stressing there is no urgency to speed up easing.
- The FOMC signaled an additional 50 basis points of easing before year-end.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, has lost its daily gains and is trading around 97.00 during the European hours on Thursday. Traders will likely observe weekly US Initial Jobless Claims later in the North American session.
However, the US Dollar (USD) gained support from strong inflation projections that have curbed expectations of more aggressive Federal Open Market Committee (FOMC) rate cuts. The Federal Reserve (Fed) lowered the funds rate by 25 basis points (bps), marking the first cut of the year. A Summary of Economic Projections (SEP), or ‘dot-plot,’ signaled a further 50 bps of easing before year-end, slightly above its June projections.
Fed Chair Jerome Powell adopted a cautious tone, describing the rate cut move as “risk management” amid labor market weakness, while emphasizing there is no urgency to accelerate easing. The newly appointed Governor Stephen Miran favored a larger 50 bps cut, leaving the committee less divided than expected.
Reuters cited Larry Hatheway, global investment strategist at the Franklin Templeton Institute, saying that markets are likely to be somewhat disappointed by the Fed’s lack of clarity and direction, as it stopped short of endorsing expectations for a clear series of rate cuts. Hatheway added, “We've had a rather cautious, not necessarily fully defensive view here for a while," which was "reinforced" by the Fed's message.
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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