The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, loses ground after registering nearly 0.75% gains in the previous session and is trading around 100.10 during Asian hours on Thursday. However, the Greenback could regain traction amid a more hawkish shift in the Federal Reserve (Fed) outlook.
The Fed left interest rates unchanged at 3.50%–3.75% at its March meeting. Chair Jerome Powell noted that while inflation is expected to ease gradually, the pace of disinflation may be slower than previously anticipated. Powell also highlighted that rising oil prices tied to the Iran conflict are likely to push inflation higher in the near term.
The Fed acknowledged uncertainty around the economic impact of the Iran war while warning of elevated upside risks to inflation. Policymakers signaled that rate cuts will be delayed until there is clearer evidence of easing inflation, although projections still point to one rate cut this year and another in 2027, in line with the December outlook.
Data released Wednesday showed US producer prices rose more than expected in February, reinforcing signs that inflationary pressures remain persistent beyond energy costs. The US Producer Price Index (PPI) increased 0.7% month-over-month (MoM) in February, up from 0.5% in January and well above expectations of 0.3%, marking the largest rise in seven months.
On an annual basis, headline PPI climbed to 3.4%, the highest level in a year, compared to 2.9% in January and forecasts for no change. Core PPI also accelerated to 3.9% YoY from 3.5% previously. Investors now turn to weekly jobless claims for further clues on labor market conditions.
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.
