US Dollar Index maintains position near 99.00 ahead of ISM PMI data
- The US Dollar Index moves little amid rising concerns over the Federal Reserve’s independence.
- The Fed is expected to deliver a 25 basis point rate cut in September after weaker labor data.
- Fed’s Daly highlighted reasons to start considering interest rate cuts, though prevailing uncertainty makes the decision difficult.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is holding ground for the second successive day and trading around 98.80 during the European hours on Tuesday. The US ISM Services Purchasing Managers Index (PMI) will be eyed later in the North American session.
The US Dollar remains steady as traders grow cautious amid increasing concerns about the US Federal Reserve’s (Fed) independence. Fed Governor Adriana Kugler unexpectedly resigned on Monday. This event has provided US President Donald Trump with an earlier-than-anticipated opportunity to influence the central bank. Trump may nominate a replacement potentially more aligned with his calls for lower rates.
However, the Greenback may struggle due to rising odds of an interest rate cut by the US Federal Reserve (Fed) in September, following weaker labor market data that has heightened concerns over the US economic outlook. According to CME’s FedWatch Tool, markets are pricing in a 91.6% chance of a Federal Reserve rate cut next month.
On Monday, Fed Bank of San Francisco President Mary C. Daly stated that although there are plenty of reasons to start looking at interest rate cuts. However, prevailing uncertainty makes it difficult for Fed officials to step into rate trimming too quickly. We can't wait to be certain there is no inflation persistence, need to make a call based on what's most likely, Daly added.
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
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
