US Dollar Index hovers near 99.50 as trading activity remains muted due to Good Friday
- The US Dollar Index remains under pressure as concerns mount over the economic fallout from tariffs on the United States.
- The CME FedWatch Tool shows that traders are now anticipating the first Fed rate cut to occur in July.
- President Trump stated that a trade deal with China could be finalized within the next three to four weeks.
The US Dollar Index (DXY), which measures the US Dollar (USD) against a basket of six major currencies, is remaining below 99.50 during the early European hours on Friday. The Greenback remains subdued amid growing concerns over the economic impact of tariffs on the United States (US). Market participants are closely monitoring developments in US trade negotiations, although trading activity is expected to be subdued due to the Good Friday holiday.
However, the US Dollar gained some support after hawkish remarks from Federal Reserve Chair Jerome Powell, who cautioned that a sluggish economy combined with persistent inflation could complicate the Fed’s policy goals and heighten the risk of stagflation. Meanwhile, President Donald Trump criticized Powell for being too slow to cut interest rates, adding that his removal “can’t come quickly enough.”
According to the CME FedWatch tool, money market traders are currently pricing in around 86 basis points of Fed rate cuts by the end of 2025, with the first reduction anticipated in July.
US President Donald Trump stated on Thursday that China had made multiple overtures and added, "I don't want to go higher on China tariffs. If China tariffs go higher, people won't buy." Trump expressed optimism that a trade agreement with China could be reached within three to four weeks.
On the labor front, the US Department of Labor reported Thursday that Initial Jobless Claims fell to 215,000 for the week ending April 12, below expectations and down from the previous week's revised figure of 224,000 (originally 223,000). However, Continuing Jobless Claims rose by 41,000 to 1.885 million for the week ending April 5.
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.