US Dollar Index holds positive ground above 98.00 on report Waller favored to Chiar Fed
- US Dollar Index trades on a positive note near 98.15 in Friday’s Asian session.
- The DXY gains ground on the report that Waller is favored to Chair Fed.
- A dovish Fed outlook and rising bets of Fed rate cuts might weigh on the US Dollar.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, edges higher to around 98.15, snapping the two-day losing streak during the Asian trading hours on Friday. The preliminary reading of the University of Michigan's Inflation Expectations report for August will be the highlight later on Friday.
The DXY gains traction after Federal Reserve (Fed) Governor Christopher Waller has reportedly emerged as the top contender to succeed embattled Fed Chair Jerome Powell. Waller argued the US central bank can “look through” the inflation impact of tariffs as transitory. He favored a quarter-point cut last week when his colleagues voted to hold rates steady.
Meanwhile, Atlanta Fed President Raphael Bostic said he still views one interest-rate cut as likely this year, adding that there are reasons to be skeptical that the inflationary effects from tariffs will be temporary.
Traders increased their bets that the Fed would cut rates in September after data showed employment growth was substantially weaker in the three months through July and consumer spending is softening. According to the CME FedWatch tool, markets have priced in nearly a 94% possibility of a 25 basis point (bps) cut at the September meeting, up from 48% a week ago. Rising expectations of Fed rate reductions might undermine the Greenback in the near term.
Data by the US Department of Labour (DOL) on Thursday showed that the Initial Jobless Claims for the week ending August 2 increased to 226K. This figure came in above the market consensus of 221K and was higher than the previous week’s 218K.
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.