US Dollar Index rises toward 104.00 as yields improve, awaits ECB decision

Jul 18, 2024 11:54 AM

The US Dollar rebounds on Thursday, driven by improved Treasury yields.
Traders expect the Fed to reduce rates in September.
ECB is expected to keep its main refinancing rate steady at 4.25% at Thursday’s meeting.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six other major currencies, rebounds due to improved US Treasury yields. The DXY holds gains around 103.80, with yields on 2-year and 10-year US Treasury bonds standing at 4.46% and 4.18%, respectively, during the European session on Thursday.

However, the US Dollar may limit its upside due to the high likelihood of a rate-cut decision by the Federal Reserve (Fed) in its September policy meeting. Federal Reserve officials have expressed increasing confidence that the pace of price increases is now more consistently aligning with policymakers' goals.

On Wednesday, Fed Governor Christopher Waller said that the US central bank is ‘getting closer’ to an interest rate cut. Meanwhile, Richmond Fed President Thomas Barkin stated that easing in inflation had begun to broaden and he would like to see it continue,” per Reuters.

According to CME Group’s FedWatch Tool, markets now indicate a 93.5% probability of a 25-basis point rate cut at the September Fed meeting, up from 69.7% a week earlier.

The New York Times reported on Wednesday that former President Donald Trump, in a meeting with House Republicans last month, expressed support for tax reductions, lower interest rates, and increased tariffs. These measures could potentially be inflationary for the economy and weaken the Greenback.

Traders anticipate the European Central Bank's (ECB) monetary policy meeting scheduled for later on Thursday. The ECB is expected to keep its main refinancing rate steady at 4.25% at July’s meeting. Additionally, traders will likely shift their attention to the US weekly Initial Jobless Claims and the Philly Fed Manufacturing Index, as well as a speech by the Fed’s Lorie Logan.

US Dollar FAQs

What is the US Dollar?

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.

How do the decisions of the Federal Reserve impact the US Dollar?

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.

What is Quantitative Easing and how does it influence the US Dollar?

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.

What is Quantitative Tightening and how does it influence the 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.

Disclaimer: For information purposes only. Past performance is not indicative of future results.