US Dollar Index falls toward 98.00 as Fed easing expectations gain traction
- US Dollar Index declines as expectations grow that the Federal Reserve will continue easing policy.
- Fed’s Miran warned recession risks rise without easing, but the need for a 50-basis-point cut dissent fades as rates fall.
- The Greenback faces headwinds as investors favor precious metals on safe-haven demand amid geopolitical tensions.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is extending its losses for the second successive session and trading around 98.10 during the Asian hours on Tuesday.
The Greenback declines amid growing expectations that the Federal Reserve will continue easing policy. However, Fed officials remain deeply divided on the path forward. Fed President Beth Hammack said on Sunday that monetary policy is in a good position to pause and assess the effects of the 75-basis-point (bps) rate cuts on the economy during the first quarter
On Monday, Fed Member of the Board of Governors Stephen Miran said in an interview on Bloomberg TV that the last few months have seen data consistent with his view of the world and that he doesn’t see a recession in the near term. Miran said that failing to ease policy would raise recession risks, adding that the need to dissent for a 50 basis points diminishes over time as rates are reduced.
The US Dollar also faces challenges as investors choose precious metals amid safe-haven demand, driven by geopolitical tensions. US President Donald Trump said on Monday that the US would keep and maybe sell the Oil it had seized off the coast of Venezuela in recent weeks. Trump added that the US would also keep the seized ships. Moreover, Ukraine continues strikes on Russian energy infrastructure, with the latest attack damaging two vessels and two piers and igniting a fire in a Black Sea coastal village.
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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