The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, trades with mild gains around 99.60 during the Asian session on Tuesday. Traders might prefer to wait on the sidelines ahead of the FOMC Minutes on Wednesday. The attention will shift to the highly anticipated US Nonfarm Payrolls (NFP) report on Thursday, despite being backward-looking.
Hawkish comments from the Fed officials could lift the DXY in the near term. Fed Vice Chair Philip Jefferson noted on Monday that the Fed should proceed “slowly” with further rate reductions. Meanwhile, several Fed policymakers, including Atlanta Fed President Bostic and Kansas City Fed President Schmid, voiced concerns about inflation or signaled support for holding rates steady.
The US government shutdown has resulted in a data blackout, leaving the Federal Reserve (Fed) with limited information to make monetary policy decisions. Traders brace for the returning US economic data later this week. For the delayed US September NFP data, the market consensus is for 50,000 jobs added in September, compared to 22,000 in August. The Unemployment Rate in the US is projected to stay at 4.3% during the same period.
If the report shows fewer jobs added than expected, this could heighten concerns about a slowing economy. This reduces confidence in the US economy and weakens the US Dollar.
Market sentiment has been clouded by economic uncertainty, with a government shutdown delaying key data and inflation lingering somewhat higher than the Fed’s target. Traders dial back expectations for further Fed rate cuts, with the odds of a December reduction declining to 46%, according to the CME FedWatch tool.
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.
