US Dollar Index retreats below 99.50 on rate cut expectations
- US Dollar Index softens to near 99.45 in Thursday’s early European session.
- Rising bets for a December US rate cut weigh on the US Dollar.
- US Initial Jobless Claims declined to the lowest level since April.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, trades on a negative note near 99.45 during the early European trading hours on Thursday. The DXY extends its downside on the growing expectations that the US Federal Reserve (Fed) will deliver a rate cut in the December policy meeting.
The US Dollar retreats from a six-month high reached a week ago to head for its largest weekly drop since July as traders increase their bets of a Fed rate reduction amid the uncertainty and dovish comments from Fed officials. Financial markets are now pricing in nearly an 83% chance of a Fed rate cut next month, up from 50% a week earlier, according to the CME FedWatch tool.
Earlier this week, Fed Governor Christopher Waller said that available data indicate that the labor market remains weak enough to warrant another quarter-point cut at the December meeting. Meanwhile, San Francisco Fed President Mary Daly noted that she supports lowering the interest rate next month because she saw a sudden deterioration in the job market, as both are more likely and harder to manage than an inflation flare-up.
On the other hand, stronger-than-expected US economic reports released on Wednesday could help limit the USD’s losses. New orders for manufactured Durable Goods Orders in the US rose 0.5% in September, the US Census Bureau revealed on Wednesday. This reading followed the 3% increase (revised from 2.9%) seen in August and came in better than the market expectation for an increase of 0.3%.
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.
Additionally, US Initial Jobless Claims for the week ending November 22 dropped by 6,000 to a seasonally adjusted 216,000 versus 222,000 prior (revised from 220,000). This figure came in below the market consensus of 225,000.