- The US Dollar is supported as Treasury yields bounce from multi-month lows.
- Dollar upside could be limited by dovish sentiment surrounding the Fed’s policy path.
- Fed Chairman Jerome Powell said a rate cut in September is “on the table.”
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six other major currencies, is recovering its intraday losses due to a recovery in US Treasury yields. The DXY is trading around 104.10 with the 2-year and 10-year US Treasury bond yields standing at 4.28% and 4.05% respectively during the Asian session on Thursday.
The US dollar faced challenges due to dovish sentiment around the Federal Reserve’s (Fed) policy path. The Fed decided to keep rates unchanged in the 5.25%-5.50% range at its July meeting on Wednesday.
On the data front, traders are awaiting further direction from US economic data, including the ISM manufacturing PMI and weekly initial jobless claims, which are scheduled for release later on Thursday. On Wednesday, the US ADP employment change rose by 122,000 in July and annual wages rose 4.8% year-over-year, according to data reported on Wednesday. This reading followed the increase of 155,000 (revised from 150,000) recorded in June and was below the market expectation of 150,000.
During a press conference following the interest rate decision, Federal Reserve Chairman Jerome Powell stated that a rate cut in September is “on the table,” while the Federal Open Market Committee (FOMC) declined to commit to anything in the statement. Powell added that the central bank will closely monitor the labor market and remain vigilant for signs of a possible sharp slowdown, according to Reuters.
However, the FOMC indicated in its statement that it does not expect to cut rates until it has greater confidence that inflation is heading sustainably toward 2%. It requires more progress on inflation before considering a cut in September, unless a significant slowdown in the labor market begins to outweigh the slow progress in inflation.
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 daily transactions. 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.
