US Dollar Index weakens below 98.00 as US government shutdown extends
- US Dollar Index softens near 97.85 in Friday’s early Asian session.
- ADP report showed private payrolls declined in September, boosting expectations that the Fed will deliver two rate cuts this year.
- Fed's Logan said central bank must be cautious on rate cuts.
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 negative note around 97.85 during the early Asian session on Friday. The US ISM Services PMI, and the final S&P Global Services PMI reports are due later on Friday. However, the US September Nonfarm Payrolls (NFP) report will not be published in light of the ongoing federal shutdown.
The US government shut down on Wednesday after a deadlocked Congress failed to reach a deal on funding. The immediate effect of a partial US government shutdown is likely to be a delay in key US macro releases, including the US employment report on Friday. The shutdown is expected to continue until next week. Senate Democrats are poised to vote against a GOP-backed short-term funding bill again tomorrow, and the Senate is unlikely to meet this weekend. The concerns over the impact of the US government shutdown could weigh on the DXY.
Furthermore, the private-sector jobs in the United States contracted last month, boosting expectations that the US Federal Reserve (Fed) will cut interest rates two more times this year. This, in turn, contributes to the USD’s downside.
The Automatic Data Processing (ADP) revealed on Wednesday that US private sector payrolls declined by 32,000 in September. This figure followed the 3,000 decrease (revised from a 54,000 increase) reported in August and came in below the market expectation of 50,000.
According to the CME FedWatch tool, markets expect a 25 basis points (bps) cut at the Fed’s October meeting and are currently pricing in a 90% possibility of an additional reduction in December.
Fed Dallas Fed President Lorie Logan on Thursday said the Fed appropriately cut rates last month to guard against the risk of a sharp deterioration in the job market, but said that so far the cooling has been gradual and signaled she is not eager to cut rates further. Any hawkish remarks from Fed officials could lift the US Dollar against its rivals in the near term.
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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