US Dollar Index weakens below 97.50 on fresh tariff threats
- The US Dollar Index loses ground near 97.30 in Thursday’s Asian session, down 0.17% on the day.
- Fed officials split between concerns over tariff-fueled inflation and signs of labor market weakness and economic strength, noted the Fed Minutes.
- The US weekly Initial Jobless Claims data will be the highlight 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, retreats from near a two-week high to 97.30 amid tariff threats after US President Donald Trump unveiled a new round of tariff demand letters.
Trump on Wednesday said he would impose a 50% tariff rate on Brazil, one of the highest so far announced for the levies, which will take effect in August. He also said that he will slap a 30% duty on Algeria, Libya, Iraq, and Sri Lanka, 25% on Brunei and Moldova, and 20% on goods from the Philippines.
Furthermore, Trump said Wednesday that the new 50% tariff on US copper imports, which he had announced the previous day, will take effect on August 1, per Reuters. The decision was made after he received a national security assessment. The uncertainty around tariff policies and the impact of tariffs on the US economy could weigh on the Greenback in the near term.
According to the Federal Reserve's (Fed) June 17-18 meeting, FOMC Minutes, few officials expressed the view that interest rates might decrease as early as this month, while the majority of policymakers continued to have concerns regarding the inflationary pressures anticipated from Trump's implementation of import taxes aimed at altering global trade.
Most participants at the Fed's meeting saw some reduction in the Fed funds rate this year as appropriate, citing that any price shock from tariffs was expected to be "temporary or modest.”
Later on Thursday, traders will keep an eye on the release of US weekly Initial Jobless Claims data. If the report shows a stronger-than-expected outcome, this could help limit the USD’s losses in the near term. Apart from this, the Fed officials are set to speak later on the same day, including Alberto Musalem, Christopher Waller, and Mary Daly.
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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