US Dollar Index (DXY) hangs near multi-month low, seems vulnerable above mid-103.00s

USD meets with a fresh supply amid worries about a tariff-driven slowdown in US growth.
Bets that the Fed will resume its rate-cutting cycle sooner further weigh on the Greenback.
The recent rally in the Euro and the JPY contributes to the strong USD bearish sentiment.

Haresh Menghani FXStreet

The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, struggles to capitalize on the previous day's modest gains and attracts fresh sellers during the Asian session on Tuesday. The index currently trades around the 103.70 area, down over 0.20% for the day, and remains close to its lowest level since early November touched last Friday.

Investors remain worried about US President Donald Trump's trade tariffs and their potential impact on the US economy. Apart from this, Friday's weaker US Nonfarm Payrolls (NFP) report pointed to signs of a cooling labor market. This continues to fuel speculations that the Federal Reserve (Fed) would cut interest rates multiple times this year, which keeps the US Treasury bond yields depressed and is seen undermining the US Dollar (USD).

Apart from this, the recent rally in the shared currency, led by a historic deal to loosen Germany’s borrowing limits, and the Japanese Yen (JPY), bolstered by bets for more interest rate hikes by the Bank of Japan (BoJ), further weigh on the Greenback. However, the prevalent risk-off environment could offer some support to the safe-haven buck. Traders might also refrain from placing aggressive bets ahead of the latest US inflation figures.

The crucial US Consumer Price Index (CPI) report is due for release on Wednesday and will be followed by the US Producer Price Index (PPI) on Thursday. This might influence market expectations about the Fed's rate-cut path, which, in turn, will play a key role in driving the near-term USD price dynamics. In the meantime, traders on Tuesday will take cues from the Job Openings and Labor Turnover Survey (JOLTS) for short-term impetuses.

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

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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