US Dollar Index rebounds to near 97.50 after breaking three-day losing streak
- US Dollar Index receives support from improved market sentiment.
- President Trump announced a trade deal with Japan that includes a 15% tariff on Japanese exports to the United States.
- Trump criticized Federal Reserve Chair Jerome Powell, stating that he will be out in eight months.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, halts its three-day losing streak and is trading around 97.50 during the Asian hours on Wednesday. Investors will likely observe the US S&P Global Purchasing Managers Index (PMI) data for July, which will be released later on Thursday.
United States (US) President Donald Trump announced a trade deal with Japan that includes a 15% tariff on Japanese exports to the US. As part of the agreement, Japan will invest $550 billion in the US and open its markets to key American products.
President Trump said during a meeting with the Philippines President Bongbong Marcos on Tuesday that “I think we will get a trade deal; we're close to a trade deal.” I don't mind if the Philippines gets along with China, he added.
Trump also took the opportunity to renew his criticism of Federal Reserve (Fed) Chair Jerome Powell, saying, “Powell’s going to be out soon anyway; he’s got to be out in eight months.” Trump argued that the economy remains strong and claimed the Fed is keeping interest rates too high, insisting, “We should be at 1%.”
On Monday, US Treasury Secretary Scott Bessent said that the Trump administration prioritizes the quality of trade agreements over their timing. "We're not going to rush for the sake of doing deals," Bessent told CNBC.
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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