US Dollar Index drifts lower to near 98.00 ahead of US Retail Sales data
- US Dollar Index edges lower to around 98.15 in Friday’s Asian session.
- US PPI climbed at a stronger pace than expected in July.
- Traders await the US Retail Sales report for July later on Friday.
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 softer note near 98.15 during the Asian trading hours on Friday. Expectations that the Federal Reserve (Fed) will cut rates in September weigh on the DXY. The US July Retail Sales data will be the highlight later on Friday, followed by the preliminary reading of the University of Michigan Consumer Sentiment gauge.
Data released by the US Bureau of Labor Statistics on Thursday showed that the US Producer Price Index (PPI) rose 3.3% YoY in July, versus the 2.4% increase prior. This reading came in stronger than the expectations of 2.5% by a wide margin. The annual core PPI climbed 3.7% in July, compared to 2.6% in June and the 2.9% expected.
Meanwhile, the US Initial Jobless Claims for the week ending August 9 fell to 224K versus 227K prior (revised from 226K). This figure was below the market consensus of 228K. The US Dollar attracts some buyers after the stronger US economic data.
However, traders remain confident that the US central bank will cut rates in the September meeting. This, in turn, might cap the upside for the DXY. Fed funds futures traders are now pricing in nearly a 92% chance of a 25 basis point (bps) cut next month, up from an 85% possibility last week, according to the CME FedWatch tool.
Traders will take more cues from the US Retail Sales report for July later on Friday. The Retail Sale in the US is expected to show an increase of 0.5% in July. If the data shows a stronger-than-expected outcome, this could help limit the DXY’s losses in the near term.
(This story was corrected on August 15 at 02:35 GMT to say, in the title, that US Dollar Index drifts lower to near 98.00 ahead of US Retail Sales data, not US PPI data.)
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.
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.
