US Dollar Index steadies near 98.50, all eyes on Fed rate decision

US Dollar Index flat lines around 98.65 in Wednesday’s early Asian session.
The Fed is widely expected to hold interest rates steady at 3.50%–3.75% at the April meeting on Wednesday.
The attention will shift to the US Q1 GDP and PCE Price Index inflation reports, which are due on Thursday.

Lallalit Srijandorn FXStreet

The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, currently trades near 98.65 during the Asian trading hours on Wednesday. The DXY holds steady as traders await a closely watched US Federal Reserve (Fed) interest rate decision later on Wednesday.

The Fed is expected to hold the federal funds rate steady between 3.50% and 3.75%, where it has sat since January. This policy meeting is likely Chair Jerome Powell's final session before a Fed Chair transition to nominee Kevin Warsh.

Traders will closely monitor Jerome Powell’s press conference after the rate decision for hints on how the Fed may react to the risks ahead. If the US central bank maintains a hawkish tone regarding persistent inflation, this could boost the US Dollar against its rivals in the near term.

"The question is what Powell is going to do, because he still holds the governor seat until 2028, so whether he chooses to resign after the expiry of the Chair term or if he stays on as a governor and as sort of a shadow Chair," said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

On Thursday, the preliminary reading of the US Gross Domestic Product (GDP) for the first quarter (Q1) and Personal Consumption Expenditures (PCE) Price Index inflation report will take center stage. If the reports show worse-than-expected outcomes, this could drag the DXY lower.

US Dollar FAQs

What is the US Dollar?

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.

How do the decisions of the Federal Reserve impact the US Dollar?

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.

What is Quantitative Easing and how does it influence the US Dollar?

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.

What is Quantitative Tightening and how does it influence the 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.

AUD/USD hangs close to monthly lows, still defends 0.7100 ahead of Fed decision

AUD/USD retains its negative bias for the third straight day, defending 0.7100 while trading close to a monthly low in Wednesday's Asian session on Wednesday. The US Dollar stands firm near a two-week high as the anticipated Fed rate hike and oil-driven inflation fears continue to push US bond yields to a multi-year high. Furthermore, escalating Middle East tensions benefit the safe-haven buck and weigh on the risk-sensitive Aussie.

USD/JPY holds firm above 155.00, awaits Fed policy announcements

USD/JPY climbs to a fresh one-week high above 155.00 in the Asian session on Wednesday amid a bullish US Dollar. Oil-driven inflation fears, along with the anticipated Fed rate hike, continue to support surging US bond yields. Moreover, rising US-Iran tensions underpin the USD's reserve currency status. The pair, however, remains below the mid-155.00s as bulls seem hesitant ahead of the Fed decision later today and the BoJ meeting, starting on Thursday.

Gold picks up pace prior to the Fed; revisits $4,350

Gold sets aside two daily declines in a row, gathering some composure and revisiting the $4,350 zone per troy ounce amid decent gains on Wednesday. The precious metal’s recovery comes despite an acceptable advance in the US Dollar and declining US Treasury yields prior to the anticipated rate hike by the Fed.

XRP Price Forecast: XRP clings to 50-day EMA support after CLARITY Act setback

Ripple (XRP) trades lower around $1.28 on Wednesday, as investors broadly assess the impact of the failed United States (US) Senate vote on the CLARITY Act and the upcoming Federal Reserve (Fed) monetary decision. The remittance token has trimmed early-week gains that tagged highs around $1.50 on Monday and now holds key moving-average support.

Federal Reserve set to raise interest rate after five meetings on hold

The United States (US) Federal Reserve (Fed) announces its interest rate decision on Wednesday, following another pivotal meeting that could provide key insights into the monetary policy outlook heading into the end of the year.

How Japan became the World's Banker and why that era may be ending

Japan's ultra-low interest rates helped finance trillions of dollars in global investments for more than a decade, making the Japanese Yen one of the world’s cheapest sources of funding. With the Bank of Japan expected to tighten policy again this week, that advantage may be entering a new phase. While most major economies raised interest rates, Japan remained the world's outlier.