US Dollar Index (DXY) retreats below 98.00, weighed by a brighter market mood
- The Dollar loses ground on Monday on declining demand for safe assets.
- Fresh concerns about the US-China trade deal are undermining the US Dollar.
- Higher hopes of Fed easing are adding pressure on the USD ahead of this week's meeting.
Friday’s US dollar recovery has been short-lived. The US Dollar Index, which measures the value of the Dollar against a basket of the most traded currencies, depreciates 0.3%, approaching the three-year lows, at 97.55 hit last week.
An improved market sentiment with investors gauging the impact of the Iran-Israel war after four days of attacks, has undermined demand for safe assets. The war has not spread to other countries as of yet, and the international pressures for a deal are boosting hopes that a peace agreement is possible.
As market’s focus has moved from the geopolitical tensions back to the US trade policy, a news report suggesdting that the US-China deal has left key issues, like rare earths exports unresolved, has revived investor’s concerns about the lack of progress on significant deals with trading partners, as the June 9 deadlone approaches. This has been weighing on the US Dollar for months.
Beyond that, traders are bracing for the Federal Reserve’s monetary policy meeting due later this week. The bank is expected to leave interest rates unchanged but might tone down its hawkish message in light of the soft US data recently seen. A dovish hold, laying the ground for a rate cut in September, might send the USD to new lows.
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
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.
