US Dollar Index (DXY) retakes the 99.00 level with Fed’s Powell on focus
- The US Dollar bounced up at the 98.60 area and returned to levels above 99.00 on Thursday.
- The Dollar is on track for its best weekly performance this year, as the Euro and the Yen plunge.
- The Focus today is on the speeches of Fed's Powell and Bowman at a bankers' conference in Washington.
The US Dollar has bounced up strongly from session lows at 98.65 area in Asia to resume its broader bullish trend, returning above the 99.00 level to test Wednesday’s highs at 99.06 at the early European session.
The US Dollar Index, which measures the value of the USD against a basket of six majors, is on track for its best weekly performance this year, boosted by sharp declines of the Euro and the yen amid political and fiscal uncertainties in France and Japan.
Euro and Yen weakness is boosting the US Dollar
The French PM, Sebastién Lecornu, resigned unexpectedly on Monday and sent the Euro tumbling. The market is now waiting for President Emmanuel Macron to name his sixth Prime Minister, who will be faced with the challenging task of reducing the country’s fiscal deficit with fierce opposition in the parliament.
In Japan, the victory of the fiscal dove Sanae Takaichi in the LDP internal elections has fueled speculation that she will revive Abenomics with a policy of big spending and a loose monetary policy, which has weakened the Yen.
This has offset concerns about the US government shutdown and market expectations of further Fed cuts, as investors await the speeches of Fed Chairman Jerome Powell and the Vice Chair of Supervision, Michelle Bowman, at a banking conference in Washington, due later today.
On Wednesday, the minutes of the September Fed meeting confirmed the divergence among Fed policymakers regarding near-term monetary policy, as a weaker labour market and higher inflationary risks pose a challenge for the central bank.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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