US Dollar Index (DXY) advances to weekly top around 99.80; lacks bullish conviction
- The USD scales higher for the second straight day on the back of Tuesday’s upbeat US data.
- US fiscal concerns and Fed rate cut bets might keep a lid on any further USD appreciation.
- Traders might also opt to wait for the key release of the FOMC meeting minutes later today.
The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, gains positive traction for the second consecutive day on Wednesday and moves further away from the monthly low touched earlier this week. The momentum lifts the index to the 99.80 region, or a fresh weekly top during the Asian session, though it seems to lack bullish conviction.
The upbeat US macro data released on Tuesday helped calm recession fears, which, in turn, is seen as a key factor acting as a tailwind for the DXY. In fact, the US Census Bureau reported that Durable Goods Orders declined by 6.3% in April, marking a stark turnaround from the 7.6% increase (revised from 9.2%) in the previous month. The reading, however, was better than the market expectation for a decrease of 7.9%. Adding to this, orders excluding transportation rose 0.2% during the reported month.
Furthermore, the Conference Board's US Consumer Confidence Index rebounded sharply after a prolonged fall since December 2024 and jumped to 98 in May. This represents a 12.3 points increase from 85.7 in April, marking the biggest monthly rise in four years amid an improving outlook for the economy and the labor market on the back of the US-China trade truce. This, in turn, inspires the USD bulls, though US fiscal concerns and dovish Federal Reserve (Fed) expectations might cap any further gains.
US President Donald Trump’s dubbed “Big, Beautiful Bill” was passed in the lower house last week and will be voted on in the Senate this week. The sweeping tax cuts and spending bill would add an estimated $4 trillion to the federal primary deficit over the next decade and worsen the US budget deficit. Moreover, traders ramped up their bets for at least two 25 basis points (bps) interest rate cuts by the Fed this year following the release of softer-than-expected US inflation figures earlier this month.
The aforementioned fundamental backdrop makes it prudent to wait for strong follow-through buying before placing aggressive USD bullish bets and positioning for any further gains. Traders might also opt to wait for more cues about the Fed's rate-cut path. Hence, the focus will remain glued to the release of FOMC meeting minutes. This week's US economic docket also features the Prelim Q1 GDP print and the Personal Consumption Expenditure (PCE) Price Index on Thursday and Friday, respectively.
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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