US Dollar Index (DXY) remains depressed below 97.00 on trade talks, US debt woes
- The Dollar trims previous losses but remains close to three-year lows..
- Hopes of trade deals between the US and partners are weighing on the safe-haven USD.
- Concerns of a debt crisis in the US are back on the table as Trump's Tax bill advances in the US Senate.
The US Dollar has bounced up from three-year lows on Monday, but remains depressed below the 97.00 level. Optimism about the latest advances on trade deals is weighing on the safe-haven USD with concerns about the impact of Trump’s sweeping tax bill return.
Investors opened the week in a risk-on mood, although optimism faded somewhat during the European session, after the US and China announced an agreement on rare earths trade that would complete the agreement announced two weeks ago.
Late Sunday, Canada´s Prime Minister. Mark Carney confirmed that the tariff talks with the US will resume this week after the country agreed to withdraw the digital tak that prompted the US side to end the conversations.
This news, coupled with rumours that negotiations with other trade partners, like the EU or Japan, are going on behind the scenes, is feeding hopes that some normalisation in global trade is possible, which is supporting riskier-perceived assets to the detriment of the safe-haven US Dollar.
In the US, Trump’s “big, beautiful bill”, that is expected to slash taxes and add between 3 and 4 trillion to the US debt pile, is making progress through the Senate. Concerns about a debt crisis in the US have returned to the forefront and are likely to act as a headwind to US Dollar’s recovery in the near term.
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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