US Dollar Index trades calmly near 99.50 while focus shifts to US ADP Employment data
- The US Dollar Index flattens around 99.40 after a recovery move from 99.00 on Monday.
- Traders seem confident that the Fed will cut interest rates in the December policy meeting.
- Investors shift focus to the US ADP Employment Change and the ISM Services PMI data.
The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades flat around 99.45 during the early European trading session on Tuesday. The USD Index has turned sideways after bouncing back from the monthly low around 99.00, revisited on Monday.
However, the US Dollar (USD) outlook remains uncertain as traders are increasingly confident that the Federal Reserve (Fed) will cut interest rates in its upcoming monetary policy announcement next week.
According to the CME FedWatch tool, there is an 87.2% chance that the Fed will cut interest rates by 25 basis points (bps) to 3.50%-3.75% in the December policy meeting.
On Monday, weaker-than-expected US ISM Manufacturing Purchasing Managers’ Index (PMI) data for November also bolstered the need for further monetary policy expansion. The Manufacturing PMI came in at 48.2, lower than estimates of 48.6 and from 48.7 in October.
Meanwhile, investors shift focus to the US ADP Employment Change and the ISM Services PMI data for November, which is scheduled for Wednesday. Financial market participants will closely monitor the private employment data to gauge the current labor market status.
Economists expect private employers to have added 10K fresh workers, significantly lower than 42K in October. The ISM Services PMI, which gauges activities in the services sector, is seen at 52.1, down from 52.4 in October.
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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