The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, moves sideways after registering modest losses in the previous session and is trading around 97.40 during the European hours on Wednesday.
The Greenback is holding firm as a partial government shutdown has pushed back key economic data releases, leaving investors in a wait-and-see mode. Both the latest job openings figures and the January jobs report, originally due this week, were postponed, offering no new insight into the strength of the US labor market.
Traders will likely watch the Institute for Supply Management’s (ISM) Services Purchasing Managers’ Index (PMI) due later in the day, which is expected to ease to 53.5 in January from 54.4 in December.
However, the shutdown ended late Tuesday after US President Donald Trump signed a $1.2 trillion budget deal with Senate Democrats to end the partial shutdown, though funding for the Department of Homeland Security remains unresolved.
An unexpected rebound in US factory activity underscores economic resilience, as the Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index (PMI) rose to 52.6 from 47.9 in December, beating market expectations of 48.5.
US President Donald Trump’s nomination of Kevin Warsh as the next Federal Reserve (Fed) Chair. Markets interpreted Warsh’s appointment as signaling a more disciplined and cautious approach to monetary easing.
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-holds-near-9750-as-us-shutdown-delays-key-data-202602040850
