US Dollar Index edges lower below 97.00 on downbeat US job data, Fed rate cut bets
- The US Dollar Index loses ground to 96.70 in Thursday’s early Asian session.
- US June private payrolls posted the first decline in more than two years.
- Traders will closely watch the US June NFP report later on Thursday.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, remains on the defensive near 96.70 during the early Asian session on Thursday. All eyes will be on the release of highly-anticipated US Nonfarm Payrolls (NFP) data for June, which is due later on Thursday.
The Greenback edges lower after the ADP National Employment Report showed US private payrolls fell for the first time in more than two years in June. US private-sector payrolls decreased 33,000 in June after a downwardly revised 29,000 gain in May. This figure came in below the market consensus of 95,000.
This downbeat report has supported market expectations of a Federal Reserve (Fed) interest rate cut, weighing on the USD. Also, the dovish comments from the Fed officials contribute to the USD’s downside. Fed Chair Jerome Powell said on Tuesday that he would not rule out a potential interest rate cut at this month's meeting, adding that everything depends on incoming data.
Traders brace for the US June employment data on Thursday for fresh impetus as it might offer some hints about the timing of interest rate reductions by the Fed. Economists expect the US NFP to increase by 110,000 in June.
Additionally, the Unemployment Rate is expected to ticker higher to 4.3% in June, while Average Hourly Earnings is estimated to remain steady at 3.9% YoY in the same report period. Any surprise upside in the US employment data could help limit the USD’s losses
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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