US Dollar Index (DXY) remains depressed below 99.00 on trade fears
- The US Dollar's recovery remains frail; the USD Index bulls are failing to extend gains beyond 98.70.
- Mounting tensions between US and China and aFed easing hopes keep weighing on the USD.
- Later today, a string of Fed policymakers will provide further clues about the bank's near-term rate path.
The US Dollar found some support at the 98.40 area earlier on Thursday, but the frail recovery attempt has remained limited well below the 99.00 area. The Index languishes at 98.60, near 10–day lows, as market concerns about the Sino-US trade rift are acting as headwinds for the US Dollar’s recovery.
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The USD Index, which measures the value of the USD against a basket of six major currencies, has depreciated nearly 1% from Tuesday’s highs, as both countries announced higher tariffs on each other’s cargo vessels. This was the tipping point of a verbal escalation following China’s decision to restrict rare earths exports.
The situation deteriorated further on Wednesday as US President Trump affirmed that there is already a trade war wi¡ith China and Treasury Secretary criticised the visit and the behaviour of China’s trade negotiator.
The economic docket remains thin amid the US Government shutdown, but the Fed’s Beige Book reported a resilient economy with slightly lower consumer spending and a stalled labour market, as businesses face higher import costs.
These conclusions endorse market expectations of further Fed monetary easing over the next months and add pressure on the US Dollar. Later on the day, a string od Fed policymakers are expected to provide further clues about the Fed’s near-term monetary policy decisions.
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.
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