US Dollar Index attracts some sellers below 98.00 as US government risks shutdown

US Dollar Index tumbles to near 97.95 in Monday’s Asian session.
Trump will meet with the top leaders in Congress later on Monday to discuss extending government funding.
Traders brace for the Fedspeak for more cues on the US interest rate path.

Lallalit Srijandorn FXStreet

The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, trades on a stronger note around 97.95 during the Asian trading hours on Monday. The DXY declines amid the growing risk of a US government shutdown.

US President Donald Trump will meet with Democratic and Republican leaders at the White House on Monday as the deadline for a possible government shutdown looms. Without funding legislation, parts of the government would close on Wednesday, the first day of the US government's 2026 fiscal year. The US government shutdown risks could exert some selling pressure on the US Dollar against its rivals in the near term.

The US Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s (Fed) preferred inflation gauge, rose 2.7% YoY in August versus 2.6% in July, the US Bureau of Economic Analysis reported Friday. Meanwhile, the core PCE Price Index, which excludes volatile food and energy prices, climbed 2.9% YoY in August, matching July's increase and analysts' estimate. On a monthly basis, the PCE and the core PCE increased 0.3% and 0.2%, respectively.

Markets imply a 90% odds of a Fed rate cut in October, with nearly a 65% chance of another reduction in December, according to the CME FedWatch Tool. Fed officials are set to speak later on Monday, including Fed Governor Christopher Waller, Cleveland Fed President Beth Hammack, St. Louis Fed President Alberto Musalem, New York Fed President John Williams and Atlanta Fed President Raphael Bostic. Any hawkish remarks from policymakers could help limit the USD’s losses.

US Dollar FAQs

What is the US Dollar?

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.

How do the decisions of the Federal Reserve impact the US Dollar?

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.

What is Quantitative Easing and how does it influence the US Dollar?

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.

What is Quantitative Tightening and how does it influence the 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.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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