- The Dollar Index (DXY) loses ground near 104.95
- Expectations of a Fed rate cut continue to weigh on the DXY.
- Cautious mood and safe-haven flows could limit the downside of the Dollar Index.
The Dollar Index (DXY) is trading in the negative territory for the second consecutive day around 104.95 during the Asian session on Thursday. The DXY is lower despite the cautious stance of the US Federal Reserve (Fed) Chairman Jerome Powell. Investors will be looking to the US June Consumer Price Index (CPI) inflation data for fresh impetus, along with the weekly Initial Jobless Claims and speeches from the Federal Reserve (Fed) Raphael Bostic.
Powell told the U.S. House Financial Services Committee on Wednesday that the U.S. central bank will make interest rate decisions based on data, incoming data, the evolving outlook and the balance of risks, and not on political factors. Powell added that it would not be appropriate to cut the policy rate until they gain greater confidence that inflation is heading sustainably toward the Fed’s 2% target.
Meanwhile, Fed Governor Lisa Cook said on Thursday that US inflation should continue to fall without a significant rise in the unemployment rate. The Fed’s cautious stance failed to boost the dollar as traders await the key US inflation report, due out on Thursday. The US CPI is expected to show a 3.1% year-on-year rise in June, while core inflation is forecast to remain stable at 3.4% year-on-year.
Should the report show lower-than-expected inflation readings, this could weigh further on the DXY. Markets have priced in less than 10% chance of a Fed rate cut in July, while the expectation for a cut in September stood at 73%, according to the CME FedWatch tool.
On the other hand, the risk-off mood ahead of key economic data coupled with political uncertainties in Europe and geopolitical risks in the Middle East could provide some support to the safe-haven US Dollar.
US Dollar FAQs
The United States 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 in circulation alongside local banknotes. As of 2022, it is the most traded currency in the world, accounting for over 88% of all global foreign exchange transactions, equivalent to an average of $6.6 trillion in transactions per day. Following World War II, the USD took over from the British Pound as the world’s reserve currency.
The single most important factor influencing the value of the US dollar is monetary policy, which is determined by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and to promote full employment. Its main tool for achieving these two goals is to adjust interest rates. When prices rise too quickly and inflation exceeds the Fed’s 2% target, the Fed raises rates, which helps the dollar. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which weighs on the 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 jammed financial system. It is an unconventional policy measure used when credit has dried up because banks are not lending to each other (for 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 of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, primarily from financial institutions. QE typically leads to a weakening of 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 of maturing securities in new purchases. It is generally positive for the US dollar.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
