US Dollar Index strengthens above 99.00 amid hope for US-China trade deal
- The US Dollar Index gains momentum to near 99.25 in Tuesday’s early European session, adding 0.22% on the day.
- Hope for US-China trade talk progress underpins the US Dollar.
- Traders will take more cues from the US May CPI inflation data. Which is due later on Wednesday.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, rebounds to around 99.25 during the early European session on Tuesday amid improved risk sentiment. Investors will closely monitor the outcome of the United States (US)-China trade talks, which are set to continue in London later on Tuesday.
Trade talks between the US and China began in London on Monday and were set to continue on Tuesday. The Trump administration indicated it would remove restrictions on some tech exports in exchange for assurances that China is easing limits on rare earth shipments, which are critical to a wide array of energy, defense and technology products.
US Treasury Secretary Scott Bessent described Monday’s discussions as a “good meeting.” Optimism over easing US-China trade tensions dampens the concerns over the economic slowdown in the world’s two largest economies, supporting the Greenback.
The US Consumer Price Index (CPI) inflation data for May will take center stage on Wednesday. The report could offer some hints about the tariff impact and interest rate outlook. The headline CPI is expected to see an increase of 2.5% YoY in May, while the core CPI is estimated to see a rise of 2.9% YoY in the same period. If the report shows a surprise softer inflation outcome, this could drag the USD lower broadly.
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
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.
