US Dollar Index strengthens above 98.00 ahead of FOMC Minutes
- US Dollar Index gains ground to around 98.30 in Wednesday’s Asian session.
- Traders reduced Fed rate cut bets in September after hotter-than-expected US July PPI data.
- The FOMC Minutes will be in the spotlight later on Wednesday.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, trades on a stronger note around 98.30 during the Asian trading hours on Wednesday. Diminishing odds for a more aggressive policy easing by the Federal Reserve (Fed) after a jump in US July wholesale prices provide some support to the DXY.
Traders ramped up expectations on a rate reduction at the Fed's September meeting after a weak July employment report, and as last month's Consumer Price Index (CPI) inflation data showed limited upward pressure from tariffs. Nonetheless, a hotter-than-expected July Producer Price Index (PPI) reading has reduced some rate-cut bets, lifting the US Dollar against its rivals.
Fed fund futures traders are now pricing in an 86% chance of a September Fed rate cut, after last week briefly fully pricing in a move, according to the CME FedWatch tool. Traders are pricing in 54 basis points (bps) of reductions by year-end.
Data released by the Commerce Department on Tuesday showed that US Housing Starts rose by 5.2% to an annual rate of 1.428 million in July, compared to a 4.6% increase in the previous month. Meanwhile, US Building Permits declined 2.8% to an annual rate of 1.354 million in July after edging down by 0.1% to a downwardly revised rate of 1.393 million in June.
Minutes of the Federal Open Market Committee (FOMC) from its July 29-30 meeting will be published on Wednesday. Traders brace for the Fed's Jackson Hole Economic Policy Symposium later on Friday for further clues on US interest rate policy. Traders are tuned into whether Fed Chair Jerome Powell will push back against market pricing of a rate cut in September. Any dovish remarks from Fed policymakers could undermine the DXY 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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