US Dollar Index depreciates to near 102.50 ahead of key economic data
- The US Dollar continues to lose ground following the mixed CPI data.
- US Consumer Price Index rose 2.9% YoY in July, against a 3% rise in June.
- A moderate increase in US inflation has sparked a debate on the extent of the Fed’s rate cuts in September.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against other six major peers, extends its losing streak for the fifth successive session. The DXY trades around 102.60 during the Asian session on Thursday. The Greenback faces challenges following Wednesday's Consumer Price Index (CPI) data, which showed a moderate increase in July's annual US inflation rate. This has raised expectations for at least a 25 basis point rate cut by the Federal Reserve (Fed) in September.
US headline Consumer Price Index (CPI) rose 2.9% year-over-year in July, slightly down from the 3% increase in June and below market expectations. The Core CPI, which excludes food and energy, climbed 3.2% year-over-year, a slight decrease from the 3.3% rise in June but aligned with market forecasts.
Investors are likely debating how much the Federal Reserve (Fed) will cut rates in September. While traders are leaning toward a more modest 25 basis point reduction, with a 60% probability, a 50 basis point cut remains a possibility. According to CME FedWatch, there is a 36% chance of the larger cut occurring in September.
However, the US Dollar received support from improved Treasury yields. 2-year and 10-year yields on US Treasury bonds stand at 3.95% and 3.83%, respectively, at the time of writing. Traders are likely awaiting US Initial Jobless Claims and Retail Sales data scheduled for release on Thursday.
On Wednesday, Reuters reported that US President Joe Biden suggested Iran might refrain from attacking Israel if a cease-fire is achieved in Gaza. These comments would contribute to strengthening the risk sentiment, which might have put pressure on the US Dollar. New cease-fire talks are scheduled for Thursday in Qatar, though Hamas has stated it will not participate in the negotiations.
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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