US Dollar Index slips below 99.00 as US-EU tension escalates
- US Dollar Index weakens as rising US–EU tensions fuel risk aversion.
- French President Emmanuel Macron urged the EU to activate its “trade bazooka,” potentially restricting US access to EU markets.
- USD upside may be capped as strong labor data pushes expectations for further Fed rate cuts to June.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is extending its losses for the second consecutive day. The DXY is trading around 98.90 during the Asian hours on Tuesday.
The Greenback declines as risk aversion increases amid rising tensions between the United States (US) and the European Union (EU). US President Donald Trump said on Saturday that a 10% tariff would be imposed from February 1 on goods from Denmark, Sweden, France, Germany, the Netherlands, Finland, Britain, and Norway until the US is allowed to purchase Greenland.
EU ambassadors agreed on Sunday to intensify efforts to deter the tariffs, while also preparing retaliatory measures if the duties are enacted. French President Emmanuel Macron reportedly urged the European Union to activate its “trade bazooka,” a measure that could restrict US access to EU markets or impose export controls, among other potential countermeasures.
The upside of the US Dollar could be restrained as strong US labor market data have pushed expectations for further Federal Reserve (Fed) rate cuts back to June. Fed officials have signaled limited urgency to ease policy without clearer evidence that inflation is sustainably moving toward the 2% target. Reflecting this shift, Morgan Stanley revised its 2026 outlook to one rate cut in June followed by another in September, instead of the previously expected cuts in January and April.
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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