US Dollar Index remains above 98.00 despite Fed rate cut bets, government shutdown
- US Dollar Index gains ground after Kansas City Fed President Schmid deliver hawkish remarks on Monday.
- The CME FedWatch Tool suggests pricing in a 94% probability of a Fed rate cut in October.
- The White House walked back Trump’s claim that government employees were already being laid off because of the shutdown.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is extending gains for the second successive session and trading around 98.20 during the Asian hours on Tuesday.
The Greenback received support from the hawkish remarks from the Kansas City Fed President Jeffrey Schmid on Monday. Schmid said that the Federal Reserve (Fed) must maintain its inflation credibility and stressed that inflation is too high. He added that monetary policy is appropriately calibrated.
However, the US Dollar may face challenges amid rising odds of further Federal Reserve (Fed) rate cuts in the upcoming meetings, along with ongoing government shutdown. The CME FedWatch Tool suggests that markets are now pricing in a 94% chance of a Fed rate cut in October and an 84% possibility of another reduction in December.
The US government shutdown has postponed the key economic data release, including September’s Nonfarm Payrolls report. US ADP Employment Change and Job Openings data indicate a softening labor market and strengthen expectations of an imminent rate cut.
The White House backed off US President Donald Trump’s claim on Monday that government employees were already being laid off due to the shutdown but cautioned that job losses could occur as the impasse appeared likely to extend into a seventh day. Meanwhile, the Republican-led Senate rejected competing funding measures for federal agencies for the fifth time. Democratic leader Chuck Schumer also refuted Trump’s assertion that negotiations with Democrats were still taking place.
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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