US Dollar Index loses traction to near 98.00 as traders ramp up Fed cut bets
- US Dollar Index softens to around 98.00 in Wednesday’s early Asian session.
- Markets ramp up Fed cut bets after softer US July CPI inflation data.
- Traders brace for the Fedspeak later on Wednesday ahead of US PPI data.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, trades in negative territory near 98.00 during the Asian trading hours on Wednesday. The DXY extends the decline due to the prospect of an imminent Federal Reserve (Fed) rate cut next month and concerns over the US central bank’s independence.
Data released on Tuesday showed cooler-than-expected inflation in the United States (US), prompting traders to raise bets of more interest rate cuts than previously expected this year. Fed funds futures traders are now pricing in nearly a 94% odds of a 25 basis points (bps) cut at the September meeting, up from an 85% chance before the Consumer Price Index (CPI) data release, according to the CME’s FedWatch tool. This, in turn, might create a headwind for the US Dollar against its rivals in the near term.
White House spokeswoman Karoline Leavitt said on Tuesday that US President Donald Trump was considering a lawsuit against Fed Chair Jerome Powell about his management of renovations at the Fed's Washington headquarters. The headline raises concerns over Fed independence and exerts some selling pressure on the USD.
Traders will take more cues from the speeches from Fed officials later on Wednesday. Chicago Fed President Austan Goolsbee and Atlanta Fed President Raphael Bostic are set to speak. On Thursday, the attention will shift to the US Producer Price Index (PPI) for July. If the report shows a hotter-than-expected outcome, this might help limit the DXY’s losses.
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
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
