US Dollar Index (DXY) consolidates losses below 97.50 amid renewed tariff concerns
- The Dollar holds marginal gains with investors cautious amid growing trade uncertainty.
- Risk appetite remains subdued as the trade talks with the European Union and Japan remain stalled.
- The DXY trades 0.15% above Monday’s lows, but still 1% below last week’s highs.
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The US Dollar is trading moderately higher against its main peers on Thursday, as US Treasuries rebound on the back of renewed concerns about global trade uncertainty. Still, it remains well below last week’s highs.
The negotiations with the European Union and Japan continue, but remarks from Eurozone negotiators suggest that the growing demands from the US are frustrating the deal. The bloc is preparing retaliatory measures, including wide-ranging anti-coercion measures targeting US services, public tenders, and investments.
Regarding Japan, the top negotiator, Akazawa, is now in Washington to unblock the negotiations, but the deal remains elusive. Trump increased pressure on Monday, complaining about the low sales of American cars and US-produced rice in Japan, and Treasury Secretary Bessent affirmed that he is focused on the quality of the agreements, rather than on the timing.
Against this background, caution is prevailing, and major FX crosses trade within previous ranges. The DXY, which measures the US Dollar against the most-traded currencies, is trading near 97.50, after having bounced at 97.25 on Monday, yet about 1% below last week’s highs at 98.50.
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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