US Dollar Index holds steady near 98.00 due to market caution
- US Dollar Index moves little as traders adopt caution due to rising tariff concerns and Fed’s independence worries.
- US Commerce Secretary Lutnick stated that August 1 is a firm deadline, but discussions are likely to continue even after.
- Treasury Secretary Bessent urged a reassessment of the Federal Reserve as an institution.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is holding ground after losing more than 0.50% in the previous session and trading at around 97.90 during the Asian hours on Tuesday. Market caution deepened amid rising uncertainty over impending tariffs and increasing worries about the Federal Reserve's (Fed) independence.
US Commerce Secretary Howard Lutnick stated unequivocally in a televised interview, “That’s a hard deadline, so on August 1, the new tariff rates will come in. Nothing stops countries from talking to us after August 1, but they’re going to start paying the tariffs on August 1.”
US Treasury Secretary Scott Bessent said the Fed’s independence on monetary policy is under threat by its "mandate creep" into non-policy areas. Bessent urged the central bank to undertake a comprehensive review of those activities.
Treasury Secretary Bessent also called for a reassessment of the Federal Reserve as an institution. President Trump’s renewed criticism of Chair Powell for not lowering interest rates has intensified speculation about a possible dismissal.
A White House official said that US President Donald Trump is likely to fire Fed Chairman Jerome Powell soon. However, Trump denied it in a Truth Social post on Sunday, calling it “typically untruthful.”
Republican Congresswoman Anna Paulina Luna has formally accused the Fed Chair Powell of committing perjury on two separate occasions, both related to discussions about the Federal Reserve's long-planned renovations of its headquarters in Washington, D.C.
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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