US Dollar Index holds near 99.50 as Jobless Claims bolster Fed pause
- US Dollar Index may gain further support as Jobless Claims reinforce expectations the Fed will keep rates unchanged.
- CME FedWatch shows a 95% probability the Fed will keep rates unchanged at January’s meeting.
- Initial Jobless Claims fell to 198K, beating expectations of 215K and down from the prior week’s 207K.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is edging lower after registering modest gains in the previous session. The DXY is trading around 99.30 during the Asian hours on Friday. Traders are likely to look for further direction from the US December Industrial Production data and comments from Federal Reserve (Fed) officials later in the day.
The Greenback received support after Thursday’s US Initial Jobless Claims data reinforced the likelihood that the Fed will keep interest rates on hold for the coming months. According to the CME Group's FedWatch tool, Fed funds futures continue to price in about a 95% probability that the US central bank will keep rates unchanged at its January 27–28 meeting.
Data from the US Department of Labor (DOL) showed Initial Jobless Claims unexpectedly fell to 198K in the week ended January 10, below market expectations of 215K and down from the prior week’s revised 207K. The data confirmed that layoffs remain limited and that the labor market is holding up despite an extended period of high borrowing costs.
The US Dollar may find additional support as Fed funds futures have pushed expectations for the next rate cut back to June, reflecting stronger labor market conditions and policymakers’ concerns over sticky inflation.
Market sentiment improved after US President Donald Trump said he has no plans to remove Fed Chair Jerome Powell despite reported Justice Department indictment threats and signalled a possible delay in action on Iran. Sentiment was further supported after the US and Taiwan signed a trade agreement on Thursday aimed at boosting American semiconductor production in exchange for lower tariffs.
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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