- The US Dollar Index gives up initial gains amid anxiety among investors with US-China trade negotiations in process.
- A positive outcome from the Sino-US trade talks could bring some certainty in the US economic outlook.
- The Fed is not expected to cut interest rates before September policy meeting.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, gives back its early gains and flattens around 99.00 during European trading hours on Tuesday. The USD Index retreats as investors turn anxious amid going trade talks between top negotiators from the United States (US) and China in London.
During European trading hours, US Commerce Secretary Howard Lutnick told reporters that trade talks with Beijing are going well and negotiations will likely continue all the day, Reuters reported.
The impact of the outcome of trade negotiations between world’s two largest economies will be significant on the US Dollar. A positive outcome from the US-China meeting could bring back investors’ confidence in the safe-haven appeal of the US Dollar (USD), assuming that it will provide some certainty over the US economic outlook.
The Greenback has been hit badly in past few months as the imposition of new economic policies by US President Donald Trump and erratic announcements on the tariff policy led investors doubting the credibility of the US Dollar.
On the domestic front, the US Consumer Price Index (CPI) data for May will be the key trigger for the US Dollar, which will be released on Wednesday. As measured by the CPI, the headline and core inflation are expected to have grown at a faster pace of 2.5% and 2.9%, respectively. Such a scenario would force traders to pare vets supporting the Federal Reserve (Fed) to reduce interest rates in the near-term.
According to the CME FedWatch tool, the US central bank is unlikely to cut interest rates before the September monetary policy meeting.
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.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
GBP/USD: Upside stalls below 1.3500 after weak UK Retail Sales data
GBP/USD pares gains while trading under 1.3500 in European trading on Friday. The pair stalls its upside after the Pound Sterling faces headwinds from the downbeat UK Retail Sales data for May. Broad US Dollar weakness, amid easing Middle East tensions, keeps the major underpinned.
EUR/USD holds firm above 1.1500 amid US Dollar pullback
EUR/USD continues its winning streak for the third successive day, holding firm above 1.1500 in the European session on Friday. The pair stands tall as the US Dollar loses ground, possibly driven by a technical pullback and receding fears over a likely US military attack on Iran. Geopolitics remain in focus.
Gold price remains on track for weekly losses amid hawkish Fed
Gold price maintains its offered tone through the early European session on Friday and remains on track to register weekly losses. The Federal Reserve's hawkish pause earlier this week is seen acting as a tailwind for the US Dollar and turning out to be a key factor driving flows away from the non-yielding yellow metal.
Shiba Inu Price Forecast: SHIB demand wanes as holders offload meme tokens
Shiba Inu (SHIB) extends its decline at the time of writing on Friday after dropping nearly 5% so far this week. The on-chain data supports a correction ahead, as SHIB holders are unloading tokens amid the escalating Iran-Israel war.
In the Eurozone, inflation is also a monetary phenomenon
Monetary aggregates continue to be closely monitored by the European Central Bank (ECB), a sign that, despite the passage of time and the increasing complexity of financing circuits, quantitative theory remains relevant.
The Best brokers to trade EUR/USD
SPONSORED Discover the top brokers for trading EUR/USD in 2025. Our list features brokers with competitive spreads, fast execution, and powerful platforms. Whether you're a beginner or an expert, find the right partner to navigate the dynamic Forex market.