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US Dollar Index (DXY) slides below 104.00; seems vulnerable to weaken further

  • USD kicks off the new week on a weaker note and snaps a three-day winning streak.
  • Bets that the Fed will resume its rate-cutting cycle soon seem to weigh on the buck.
  • A positive risk tone also undermines the safe-haven USD and contributes to the slide.

The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, struggles to capitalize on a three-day-old recovery from a multi-month low and attracts fresh sellers at the start of a new week. The index remains depressed through the first half of the European session and is currently placed below the 104.00 mark, down around 0.20% for the day. 

The Federal Reserve's (Fed) less dovish outlook maintained its forecast to deliver two 25 basis points rate cuts by the end of this year and gave a bump higher to its inflation projection. Investors, however, have been speculating that the US central bank will resume its rate-cutting cycle sooner than expected amid worries about a tariff-driven slowdown in US economic activity. This, in turn, is seen undermining the Greenback.

Meanwhile, Reports over the weekend indicated that US President Donald Trump is planning a narrower, more targeted agenda for the so-called reciprocal tariffs set to take effect on April 2. This boosts investors' appetite for riskier assets and turns out to be another factor denting demand for the safe-haven buck. That said, a goodish pickup in the US Treasury bond yields could help limit any meaningful downside for the USD. 

Traders now look forward to the release of the flash US PMIs, which, along with speeches by influential FOMC members, might provide some impetus to the Greenback. The focus, however, will remain glued to the US Personal Consumption Expenditure (PCE) Price Index on Friday, which could offer fresh cues about the Fed's rate-cut path and determine the next leg of a directional move for the Greenback. 

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.


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Haresh Menghani

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

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