The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is gaining ground after recovering recent losses from the previous session and trading around 99.00 during the Asian hours on Thursday.
The Greenback receives support as US President Donald Trump said late Wednesday that he expects to strike several agreements with Chinese President Xi Jinping during their meeting in South Korea next week. The Trump-Xi discussions are expected to cover a wide range of issues, including US soybean exports, limiting nuclear weapons, and China’s purchases of Russian Oil.
However, Reuters reported that the Trump administration is considering a broad plan to restrict exports to China of products powered by or manufactured with US software, spanning items from laptops to jet engines, in response to Beijing’s recent curbs on rare earth exports.
The US Dollar may again lose ground due to the prolonged US government shutdown, which delays key US economic data releases, including Nonfarm Payrolls (NFP), adding uncertainty for financial markets and the Federal Reserve (Fed). The CME FedWatch Tool indicates that markets are now pricing in nearly a 97% chance of a Fed rate cut in October and a 96% possibility of another reduction in December.
A Reuters poll suggested that 115 out of 117 economists have predicted that the Fed will reduce interest rates by 25 basis points (bps) to 3.75%-4.00% in the monetary policy announcement on October 29. For the year, 83 of 117 economists expect the US Federal Reserve to cut interest rates twice, while 32 anticipate one cut.
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.
