US Dollar Index (DXY) consolidates losses below 97.80 with Fed's Powell on focus
- The Dollar has depreciated by more than 1.3% from Monday's highs.
- Risk appetite and dovish comments from Fed officials keep USD's upside attempts limited.
- Fed Powell's testimony to Congress is likely to set the US Dollar's near-term direction.
The US Dollar is one of the worst performers on Tuesday, hammered by weaker demand for safe assets, after the ceasefire between Israel and Iran and higher hopes for further Fed easing in the coming months.
The DXY, which measures the value of the US Dollar against the world’s six most traded currencies, has given away most of the last two weeks’ gains on a nearly 1.4% reversal from Monday’s highs. Price action is approaching the three-year low, at 97.13, with upside attempts capped below 97.80 so far.
US President Donald Trump boosted investors’ appetite for risk late on Monday with the announcement of a ceasefire in the Middle East, which sent the US Dollar and other safe havens tumbling.
Tehran has denied Israel's accusations of a violation of the ceasefire. Tel Aviv has vowed a strong response to any attack but, so far, market sentiment remains positive, with European stocks in green and Oil prices more than $10 below Monday’s highs. In this context, the US Dollar is likely to be on its back foot.
A dovish Fed added pressure on the US Dollar
If this was not enough, the recent dovish comments by Fed officials have heightened hopes of a rate cut in July or, most likely, in September, and have increased pressure on the USD.
On Monday, Fed Vice Chair for Supervision, Michelle Bowman joined her colleague Christopher Waller in his call for a rate cut in July. The inflationary impact of tariffs is likely to be over than expected, said Bowman, and this would allow the bank to act to support a deteriorating labour market.
Against this backdrop, Fed Chairman Jerome Powell will testify to Congress later today to explain the bank’s plans to navigate a complex outlook of softer growth and higher price pressures. Investors will be looking for dovish signs to confirm an upcoming rate cut.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
