US Dollar Index hovers near 97.50 as 10-year yield rises, Fed outlook shifts
- US Dollar Index could gain support as the 10-year Treasury yield rises on shifting Fed expectations.
- US factory activity unexpectedly expanded, with the ISM Manufacturing PMI rising to 52.6, well above expectations.
- Trump’s nomination of Kevin Warsh as Fed Chair signaled that markets expect a more cautious, disciplined approach to monetary easing.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is edging lower after two days of gains and trading near 97.50 during the Asian hours on Tuesday.
The Greenback received support as the yield on the 10-year US Treasury bond hovered near 4.27% on Tuesday after a nearly 1% rise in the prior session, underpinned by strong US economic data and shifting Federal Reserve (Fed) policy expectations toward hawkish.
Data on Monday showed an unexpected rebound in US factory activity, underscoring economic resilience, as the Institute for Supply Management's (ISM) Manufacturing Purchasing Managers' Index (PMI) rose to 52.6 from 47.9 in December, beating market expectations of 48.5.
Last week, US President Donald Trump nominated Kevin Warsh as the next Federal Reserve (Fed) Chair. Markets interpreted Warsh’s appointment as signaling a more disciplined and cautious approach to monetary easing.
The US Dollar gained traction as risk sentiment improved after the US Senate reached an agreement to advance a government funding package, thereby averting a shutdown. Trump also announced a trade deal with India, lowering tariffs on both sides in return for New Delhi halting purchases of Russian Oil.
St. Louis Fed President Alberto Musalem said further rate cuts are unwarranted, calling the 3.50%–3.75% policy range broadly neutral, while Atlanta Fed President Raphael Bostic urged patience, saying policy should stay modestly restrictive.
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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