- The US dollar is supported by rising risk aversion.
- Dollar upside could be limited due to dovish sentiment surrounding the Fed’s policy stance.
- Falling Treasury yields could put pressure on the US dollar.
The Dollar Index (DXY), which measures the value of the US Dollar (USD) against six other major currencies, is moving sideways and trading around 104.50 during early European hours on Wednesday. Falling US Treasury yields might have put pressure on the Dollar, with the 2-year and 10-year bond yields standing at 4.44% and 4.24% respectively at the time of writing.
However, the US Dollar (USD) could face pressure as expectations of a Federal Reserve (Fed) rate cut in September rise. Last week, Fed Chair Jerome Powell noted that the three US inflation readings this year “raise some confidence” that inflation is on track to meet the Fed’s target sustainably, implying that interest rate cuts could be approaching.
According to the CME Group’s FedWatch tool, markets now indicate a 93.6% probability of a 25 basis point rate cut at the Fed’s September meeting, up from 88.5% the day before.
Meanwhile, investors are looking for further developments regarding the US presidential election in November. Market experts see Donald Trump winning the election even though Democrats are uniting behind Vice President Kamala Harris as the front-runner for the presidential nomination. NBC News projected that Harris had secured the backing of a majority of pledged delegates from the Democratic Party convention. The threshold for securing the nomination is 1,976 delegates, and NBC estimates that Harris has received the support of 1,992 delegates, either through spoken or written endorsements.
Investors are expected to closely monitor the US Purchasing Managers’ Index (PMI) data, due later in the North American session. In addition, attention will be focused on the annualized second-quarter Gross Domestic Product (GDP) figures, due on Thursday. These reports are expected to offer fresh insights into economic conditions in the United States.
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.
