United States Dollar Index weakens despite rising inflation concerns, Fed rate hike bets
- US Dollar Index downside could be capped as traders price in a 60% chance of a Fed rate hike via the CME FedWatch Tool.
- Rising oil prices heighten inflation concerns, helping to restrain losses for the Greenback.
- US CPI and PPI inflation reports this week will guide the Fed's September policy decisions.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is losing ground for the third consecutive day and trading around 98.80 during Asian hours on Wednesday.
However, the downside for the Greenback could be restrained as rising oil prices intensify inflation concerns and strengthen expectations for a Federal Reserve (Fed) rate hike. Crude oil prices have climbed following a US strike on several Iranian tankers near Kharg Island, a major export hub. These attacks have heightened geopolitical tensions and stoked market concerns regarding potential disruptions to global oil supplies.
According to the CME FedWatch Tool, traders are currently pricing in about a 60% chance of an interest rate hike at the US central bank's upcoming policy meeting. Looking ahead, the US Producer Price Index (PPI) and Consumer Price Index (CPI) inflation data will take center stage later this week. These crucial readings may shed fresh light on the Federal Reserve's next steps ahead of the September meeting.
Fed hesitation keeps Dollar under pressure despite bond market jitters
Economists at National Bank of Canada acknowledge that, “under these circumstances, one might ask what would prevent the Fed from soon raising its policy rate for the first time since 2023 and, in the process, putting a floor under the greenback.” However, they caution against over-interpreting recent data and market moves, pointing to Fed Chair Kevin Warsh’s reminder in his inaugural Jackson Hole speech that “yesterday’s news has a way of getting mistaken for what is happening right now.” In their view, “that observation is particularly relevant in the bond market,” where shifting narratives can quickly cloud the underlying policy outlook.
Technical Analysis:
In the daily chart, Dollar Index Spot trades at 98.80, extending a bearish near-term bias as price holds beneath both the nine-period Exponential Moving Average (EMA) at 99.07 and the 50-period EMA at 99.69. The configuration keeps the short-term trend capped by these descending averages, while the 14-day Relative Strength Index (RSI) near 38 suggests lingering downside pressure rather than an imminent bullish reversal.
On the topside, initial resistance is seen at the nine-EMA, with a stronger barrier emerging at the 50-EMA, where a recovery rally would likely struggle unless momentum improves. With no clear technical support levels derived from the provided indicators below the current price, traders may look to prior swing lows on the broader chart for potential demand zones, while the subdued FXS Fed Sentiment Index reading around 125.72 hints that macro conviction behind the dollar remains soft.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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