The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, holds steady above mid-99.00s through the Asian session on Tuesday, though it lacks bullish conviction. Moreover, the fundamental backdrop seems tilted in favor of bearish traders and warrants some caution before positioning for any meaningful appreciating move.
The Senate late on Sunday reached a compromise and moved forward on a measure aimed at ending the longest US government shutdown in American history that began on October 1. The US Dollar (USD), however, struggles to attract any meaningful buyers as investors await a flood of delayed data to shed more light on growth amid fears about an economic fallout from the US government closure. This, in turn, is holding back traders from placing aggressive bullish bets and acting as a headwind for the USD.
Meanwhile, investors seem tilted towards a more dovish US Federal Reserve (Fed), which turns out to be another factor that contributes to capping the upside for the Greenback. According to the CME Group’s FedWatch Tool, markets now see an over 60% chance of another rate cut by the Fed in December. The bets were lifted by the University of Michigan’s Survey on Friday, which showed that the US Consumer Sentiment Index slumped to 50.3 in November, or the lowest level since June 2022, from 53.6 in the previous month.
US banks will be closed on Tuesday in observance of Veterans Day, leaving the USD at the mercy of Fed rate cut expectations. Hence, the market focus will remain glued to speeches from influential FOMC members on Wednesday. Traders will look for more cues about the Fed’s future rate-cut path, which, in turn, will continue to play a key role in driving the USD demand in the near term.
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.
