US Dollar Index holds below 105.00 as traders await US CPI inflation data
- The US Dollar Index (DXY) loses ground near 104.95
- Fed rate cut bets continue to undermine the DXY.
- The cautious mood and safe-haven flows might cap the USD Index’s downside.
The US Dollar Index (DXY) trades in negative territory for the second consecutive day around 104.95 during the Asian session on Thursday. The DXY edges lower despite the cautious stance of the US Federal Reserve (Fed) Chair Jerome Powell. Investors will watch the US June Consumer Price Index (CPI) inflation data for fresh impetus, along with the weekly Initial Jobless Claims and speeches by the Federal Reserve’s (Fed) Raphael Bostic.
Fed’s Powell said on Wednesday before the US House Financial Services Committee that the US central bank will make interest rate decisions based on the data, the incoming data, the evolving outlook, and the balance of risks, and not in consideration of political factors. Powell added that it would not be appropriate to cut the policy rate until they gain greater confidence in inflation heading sustainably towards the Fed’s 2% target.
Meanwhile, Fed Governor Lisa Cook said on Thursday that US inflation should continue to fall without a significant further rise in the Unemployment Rate. The Fed’s cautious stance failed to boost the Greenback as traders await the US key inflation report, which is due on Thursday. The US CPI is expected to show an increase of 3.1% YoY in June, while core inflation is forecast to remain steady at 3.4% YoY.
In case the report shows softer-than-expected inflation readings, this could further weigh on the DXY. The markets have priced in less than 10% odds of a Fed July rate cut, while the expectation for a September cut stood at 73%, according to the CME FedWatch Tool.
On the other hand, the risk-off mood ahead of the key economic data, along with the political uncertainties in Europe and geopolitical risks in the Middle East might provide some support to the safe-haven US Dollar.
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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