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US Dollar Index remains subdued near 97.50 as traders await key economic data

  • US Dollar Index weakens as traders turn cautious ahead of key economic data delayed by the partial government shutdown.
  • January US Nonfarm Payrolls are expected to show labor market stabilization, with 70,000 job gains and unemployment steady at 4.4%.
  • Markets expect the Fed to hold rates in March, with cuts likely in June and possibly September.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, extends its losses for the second successive session and is trading near 97.60 during the Asian hours on Monday.

The Greenback struggles as traders adopt caution ahead of looming key economic data delayed by the partial government shutdown. The January jobs report, due Wednesday, is expected to signal stabilization in the labor market, with the US Nonfarm Payrolls to add 70,000 jobs, while the Unemployment Rate is seen holding steady at 4.4%. The postponed January consumer price index reading is scheduled for Friday.

However, market sentiment improved on Friday after preliminary figures showed the Michigan Consumer Sentiment Index unexpectedly rose to a six-month high. The index increased to 57.3 in February, marking a third straight monthly gain and exceeding expectations of 55.0.

Markets widely expect the Fed to leave interest rates unchanged in March, with rate cuts likely in June and possibly September. San Francisco Fed President Mary Daly said on Friday that the economy may stay in a low-hiring, low-firing phase, though it could shift toward no hiring and higher layoffs.

Fed Governor Phillip Jefferson said future policy moves will depend on incoming data and the broader economic outlook, adding that the labor market is gradually stabilizing. Meanwhile, Atlanta Fed President Raphael Bostic warned that inflation has remained elevated for too long, emphasizing in a Bloomberg interview that the Fed must remain focused on inflation risks.

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

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.

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