US Dollar Index (DXY) slides to over one-week low, seems vulnerable below mid-98.00s
- The USD drifts lower for the third straight day and is pressured by a combination of factors.
- Bets for more interest rate cuts by the Fed continue to dent sentiment around the Greenback.
- Economic risks stemming from the US government closure and trade war weigh on the buck.
The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, remains under some selling pressure for the third straight day and drops to an over one-week low during the Asian session on Thursday. The index is currently placed just below mid-98.00s and seems vulnerable to prolong the recent pullback from the highest level since early August, touched last week.
Dovish Federal Reserve (Fed) expectations, along with concerns that a prolonged US government closure and the US-China trade war would affect the economic performance, turn out to be key factors undermining the USD. In fact, traders have nearly fully priced in the possibility that the US central bank will cut interest rates by a 25-basis-points (bps) each at the October and December policy meetings.
The Senate once again failed to advance the House-passed GOP bill to fund the government for a ninth time on Wednesday as the shutdown stretched into a third week. Democrats remain defiant against US President Donald Trump's mass firing threats, while a federal judge temporarily blocked the Trump administration from firing federal workers amid the ongoing shutdown, which started on October 1.
Meanwhile, US-China trade tensions reignited in recent weeks after the US broadened tech restrictions and China outlined tighter export controls on rare earths. Moreover, both countries announced port fees on vessels linked to each other’s fleets, fueling worries about an all-out trade war. US President Donald Trump said that he saw the US as locked in a trade war with China.
However, US Treasury Secretary Scott Bessent proposed a longer pause on high tariffs on Chinese goods if China halts its plan for strict export controls on critical minerals. Nevertheless, the uncertainty might continue to exert downward pressure on the USD and validate the near-term negative outlook. Traders now look to speeches from a slew of influential FOMC members for a fresh impetus.
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
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
