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US Dollar Index stays below 97.00 after China urged curbs on Treasury holdings

  • US Dollar Index weakens on fears of softer foreign demand after China urged curbs on US Treasury holdings.
  • The Greenback weakens as improved risk sentiment and heavy US data temper demand and Fed policy expectations.
  • US one-year inflation expectations eased to 3.1% in January from 3.4%, the lowest in six months.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, remains subdued for the third successive session and is trading near 96.80 during the Asian hours on Tuesday. Traders will likely observe US Retail Sales data due later in the North American session.

The US Dollar faces challenges amid concerns that foreign demand for dollar-denominated assets may weaken, after Chinese regulators urged financial institutions to curb US Treasury holdings to reduce concentration risks and exposure to uncertain US economic policies.

The Greenback is under pressure as improving risk sentiment ahead of a heavy US data calendar this week tempers demand and shapes expectations for the Fed’s policy outlook. Markets expect rates to be held in March, with the first cut likely in June and a possible follow-up in September.

US inflation expectations have eased, with median one-year-ahead expectations falling to 3.1% in January from 3.4% in December, the lowest in six months. Food price expectations were steady at 5.7%, while three- and five-year expectations remained unchanged at 3%.

Markets currently expect the Fed to keep interest rates unchanged in March, with potential rate cuts anticipated in June and possibly September. San Francisco Fed President Mary Daly said in a LinkedIn post on Friday that the economy may remain in a low-hiring, low-firing environment, though it could also shift toward a no-hiring, higher-firing phase.

Traders await the delayed January US employment report and upcoming CPI data due later in the week, which are expected to shape views on economic cooling and the timing of potential Federal Reserve easing.

Federal Reserve Board Governor Stephan Miran said on Monday the Fed should remain fully independent of political influence, before tempering his remarks by noting that complete, 100% independence is “impossible.”

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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