The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is edging lower after registering modest gains in the previous session and hovering around 98.50 during the Asian hours on Wednesday. Traders are looking forward to the upcoming US economic data that could shape expectations for Federal Reserve (Fed) policy.
US ADP Employment Change and ISM Services Purchasing Managers’ Index (PMI) data for December will be eyed later in the day. Attention will be shifted toward the US Nonfarm Payrolls (NFP) due on Friday, which is expected to show job gains of 55,000 in December, down from 64,000 in November.
The safe-haven Greenback inches lower as traders have so far largely shrugged off escalating geopolitical tensions worldwide following the United States (US) intervention in Venezuela and the capture of President Nicolas Maduro.
The US Dollar faces challenges amid widening divisions within the Fed, and US President Donald Trump’s imminent pick for the next Fed Chair has further clouded the US monetary policy outlook. According to the CME Group’s FedWatch tool, Fed funds futures continue to price in about an 82.8% probability that the US central bank will keep rates unchanged at its January 27–28 meeting.
Fed Governor Stephen Miran said on Tuesday that the US central bank should cut interest rates aggressively this year to sustain economic momentum, while Minneapolis Fed President Neel Kashkari warned the unemployment rate could “pop” higher.
Meanwhile, Richmond Fed President Tom Barkin, a non-voter on the rate-setting committee this year, said rate moves must be “finely tuned” to incoming data amid risks to both employment and inflation goals, according to Reuters.
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.
Source: https://www.fxstreet.com/news/us-dollar-index-remains-subdued-near-9850-amid-risk-on-mood-us-data-eyed-202601070513
