- The US dollar index is quoted around 102.70 in the European session on Thursday.
- The fears of a recession in the United States drag the US dollar down.
- Fed officials are cautious when warning about persistent inflation, according to FOMC minutes.
The American dollar index (DXY), an index of the value of the US dollar (USD) measured in front of a basket of six world currencies, quotes in negative territory for the third consecutive day about 102.70, lowering 0.28% in the day. Investors will keep an eye on the US Consumer Price Index (CPI) and in the weekly reports of initial unemployment subsidy applications, which will be published later on Thursday.
The dollar slides down after the US president Donald Trump intensified his commercial war against China while temporarily pause tariffs over many other countries for 90 days. “It seems likely that the US president gave (when) faced a possible recession, a political reaction, an almost bear market of shares and the first warning signs of a financial crisis,” said Kyle Rodda, capital of capital.com. “Now there is less confidence in the US government among investors,” he added.
The Federal Reserve officials (FED) of the US recognized that inflation could be more persistent than expected, since there is a high degree of uncertainty around Trump’s tariffs, according to the minutes of their March meeting. This uncertainty has also generated concerns about a possible economic slowdown in the US, the president of the Fed of Minneapolis, Neel Kashkari, warned of Wednesday that continued economic uncertainty could push the US economy to a recession.
In addition, the president of the Fed of Cleveland, Beth Hammack, adopts a cautious position on the forecasts of interest rates, saying that the uncertainty around the US commercial policy will continue to make it difficult to participate that the central bank participates in market softening operations.
Operators have raised their estimates of rate cuts in recent weeks. According to the CME Fedwatch tool, derivative markets now imply a 44% possibility that the Fed cuts rates at its next May 6-7 meeting, compared to 14% of a week ago.
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 in circulation along with local tickets. According to data from 2022, it is the most negotiated currency in the world, with more than 88% of all global currency change operations, which is equivalent to an average of 6.6 billion dollars in daily transactions. After World War II, the USD took over the pound sterling as a world reserve currency.
The most important individual factor that influences 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 promote full employment. Its main tool to achieve these two objectives is to adjust interest rates. When prices rise too quickly and inflation exceeds the 2% objective set by the Fed, it rises the types, which favors the price of 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 promulgate quantitative flexibility (QE). The QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is an unconventional policy measure that is used when the credit has been exhausted because banks do not lend each other (for fear of the default of the counterparts). It is the last resort when it is unlikely that a simple decrease in interest rates will achieve the necessary result. It was the weapon chosen by the Fed to combat the contraction of the credit that occurred during the great financial crisis of 2008. It is that the Fed prints more dollars and uses them to buy bonds of the US government, mainly of financial institutions. Which usually leads to a weakening of the US dollar.
The quantitative hardening (QT) is the reverse process for which the Federal Reserve stops buying bonds from financial institutions and does not reinvote the capital of the wallet values that overcome in new purchases. It is usually 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.
