US Dollar Index (DXY) treads water around 97.60 with all eyes on the Fed
- The US Dollar Index remains trapped within previous ranges around 97.60.
- Investors are likely to wait and see ahead of Wednesday's Fed decision.
- Soft US data and moderate inflation figures have boosted hopes of a steeper Fed easing cycle.
The US Dollar has opened the week on a moderate bearish tone, but price action remains trapped within previous ranges, highlighting a hesitant market, with investors looking from the sidelines ahead of the Fed decision, due next Wednesday.
The Index is trading practically flat at 97.50 at the European session opening times, with bears contained above 97.50 and upside attempts limited at 97.70 so far, below Friday’s high, at 97.80.
US Consumer Confidence deteriorates beyond expectations
Recent US data showed that consumer confidence deteriorated more than expected, reaching its lowest levels in four months. The University of Michigan Consumer Sentiment Index dropped to 55.4 from 58.2 in the previous month, well below the 58.0 level anticipated by the market consensus.
US consumers said that higher prices have prompted them to limit their purchasing activity, with 60% mentioning trade tariffs as a key concern. Short-term inflation expectations remained steady, while, in the longer run, price pressures are expected to rise further.
These figures, together with the moderate inflation figures seen earlier last week, practically confirm a 25 bps rate cut by the Fed on Wednesday, and probably also a dovish turn on the bank’s interest rate projections and on Fed Chairman Powell’s speech. Such an outcome would add bearish pressure on the US Dollar.
On Monday, US Treasury Secretary Scott Bessent affirmed that progress has been made to solve the TikTok issue and showed his willingness to maintain “a good relationship with our Chinese counterparts”. These comments have provided some support to the US Dollar.
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.
