US Dollar Index weakens below 99.0 on rising Fed rate cut bets
- US Dollar Index weakens to around 98.90 in Monday's early Asian session.
- Analysts expect a 25 basis points rate cut at the December meeting on Wednesday.
- US Consumer Sentiment rose for the first time in five months
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, trades on a negative note near 98.90 during the Asian trading hours on Monday. The growing expectations that the US Federal Reserve (Fed) will deliver a rate cut in the December policy meeting weigh on the DXY.
Markets expect a rate cut from the US central bank on Wednesday due to recent softer US economic data and moderating inflation reports. Fed funds futures traders are now pricing in nearly an 90% chance of a rate reduction in the December meeting, up from 71% probability a week ago, according to the CME FedWatch Tool.
Traders will closely monitor the press conference from Fed Chair Jerome Powell, which might offer some hints about the US interest rate path. Any hawkish comments from the Fed officials could provide some support to the DXY in the near term.
On the other hand, the upbeat US economic data could help limit the US Dollar’s losses. The University of Michigan’s US Consumer Sentiment Index rose to 53.3 in December from a final reading of 51.0 in November. This figure came in stronger than the estimation of 52.0.
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.
