US Dollar Index remains subdued around 107.00 as Treasury yields continue to fall
- The US Dollar Index loses ground as yields on US Treasury notes extend their losses.
- Trump has confirmed plans to impose a 25% tariff on imports of automobiles, semiconductors, and pharmaceutical products.
- The latest FOMC Meeting Minutes emphasized needing more time to assess multiple factors before considering any rate adjustments.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, depreciates after registering gains for the last two successive days amid falling Treasury yields. The DXY hovers around 107.00. with 2- and 10-year yields on US Treasury bonds standing at 4.26% and 4.52%, respectively, during the European hours on Thursday.
Market participants are now focused on key US economic data, including weekly Initial Jobless Claims, the CB Leading Economic Index, and the Philly Fed Manufacturing Index, set to be released during the North American session.
However, the US Dollar gained ground as risk aversion rose due to concerns over the latest tariffs from US President Donald Trump, who has confirmed that a 25% tariff on pharmaceutical, semiconductor, and auto imports will take effect in April.
The US Dollar may appreciate as the cautious tone rises following the Federal Open Market Committee (FOMC) Minutes from January’s policy meeting. Federal Reserve (Fed) policymakers reaffirmed the decision to keep interest rates unchanged in January. They also emphasized the need for more time to assess economic activity, labor market trends, and inflation before considering any rate adjustments. The committee also agreed that clear signs of declining inflation are necessary before implementing rate cuts.
Markets are pricing in one rate cut for the federal funds rate in 2025, with the potential for a second. Fed Vice Chairman Philip Jefferson stated late Wednesday that the US central bank has time to assess its next interest rate move, citing a resilient economy and persistent inflation. Meanwhile, Chicago Fed President Austan Goolsbee acknowledged that while inflation has eased, it remains elevated, emphasizing that rate cuts would be considered once inflation reaches a more acceptable level, according to Reuters.
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.
