- The US dollar rebounds on Thursday, boosted by improving Treasury yields.
- Traders expect the Fed to cut rates in September.
- The ECB is expected to keep its main refinancing rate at 4.25% at Thursday’s meeting.
The Dollar Index (DXY), which measures the value of the US Dollar (USD) against six other major currencies, is rebounding on the back of improving US Treasury yields. The DXY is holding gains around 103.80, with the 2-year and 10-year US Treasury bond yields standing at 4.46% and 4.18%, respectively, during the European session on Thursday.
However, the US dollar could limit its upside due to the high probability of a rate-cut decision by the Federal Reserve (Fed) at its September policy meeting. Federal Reserve officials have expressed growing confidence that the pace of price increases is now aligning more consistently with policymakers’ goals.
On Wednesday, Fed Governor Christopher Waller said the U.S. central bank is “getting close” to an interest rate cut. Meanwhile, Richmond Fed President Thomas Barkin said the easing of inflation had begun to broaden and he would like to see it continue, according to Reuters.
According to the CME Group’s FedWatch tool, markets now indicate a 93.5% probability of a 25 basis point rate cut at the Fed’s September meeting, up from 69.7% the previous week.
The New York Times reported Wednesday that former President Donald Trump, in a meeting with House Republicans last month, expressed support for tax cuts, lower interest rates and higher tariffs. These measures could be potentially inflationary for the economy and weaken the dollar.
Traders are looking ahead to the European Central Bank’s (ECB) monetary policy meeting scheduled for later on Thursday. The ECB is expected to hold its main refinancing rate at 4.25% at the July meeting. In addition, traders are likely to focus their attention on weekly U.S. initial jobless claims and the Philadelphia Fed manufacturing index, as well as a speech by the Fed’s Lorie Logan.
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.
