US Dollar Index holds steady above 97.00 ahead of Fed’s Powell speech
- US Dollar Index flat lines around 97.30 in Tuesday’s Asian session.
- Traders have reined in bets of Fed rate cuts in the October meeting.
- Fedspeak and the advanced US S&P Global PMI reports will be the highlights later on Tuesday.
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 stronger note near 97.30 during the Asian trading hours on Tuesday. The DXY trades on a flat note as traders await remarks by the Federal Reserve policymakers for more clues on the path of interest rates.
Traders reduce their bets that the US Federal Reserve (Fed) will cut its key interest rate in the October meeting after several Fed officials suggested a more cautious approach to the easing cycle and emphasized that there remain upside inflation risks. Financial markets are now pricing in nearly a 10.2% odds of a hold, compared to a chance of 8.1% on Friday, according to the CME FedWatch tool.
However, the Fed's updated projections, the so-called “dot plot,” indicate that two more quarter-points are likely before the year-end, and Fed Chair Jerome Powell highlighted that the path forward is not pre-set and will depend on incoming economic data. Traders will also monitor the speech from Powell for some hints about the US interest rate outlook.
On Monday, St. Louis Fed President Alberto Musalem stated that he supported the rate cut at last week's Fed meeting as a precautionary move to protect the job market but said there may be "limited room" for further reductions as inflation remains above the target. Meanwhile, Fed Governor Stephen Miran, who voted against the quarter-percentage-point reduction in favor of a steeper 50 bps rate cut last week, said on Monday that the central bank should cut interest rates aggressively to reduce risks to the economy's outlook.
The preliminary reading of the US S&P Global Purchasing Managers Index (PMI) reports for September will be published later on Tuesday. If the reports show a weaker-than-expected outcome, this could undermine the US Dollar against its rivals.
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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