US Dollar Index holds above 97.50 ahead of UoM Consumer Sentiment Index data
- US Dollar Index maintains its position as traders adopt caution ahead of the Michigan Consumer Sentiment Index data.
- The US Dollar may lose ground as the odds of a half-point rate cut by the Federal Reserve increase.
- US Treasury Secretary Scott Bessent is set to meet Chinese counterparts in Madrid next week for continued high-level talks.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is recovering its recent losses and trading around 97.70 during the Asian hours on Friday. The Greenback holds gains ahead of the release of the University of Michigan (UoM) Consumer Sentiment Index due later in the North American session.
However, the US Dollar faced challenges as recent mixed key economic data from the United States (US) firmed a Federal Reserve (Fed) 25 basis-point rate cut next week. The chance that the US central bank will cut by a half percentage point also edges higher.
The US Consumer Price Index (CPI) rose 2.9% year-over-year in August, as expected, coming in higher than 2.7% in July. Meanwhile, the CPI inflation climbed to 0.4% month-over-month from a 0.2% increase prior. The core CPI, which excludes volatile food and energy prices, increased 3.1% on a yearly basis in August, matching the estimate. US Initial Jobless Claims rose to 263K, the highest since 2021, against the expected 235K and 236K prior (revised from 237K).
Reuters cited the US Treasury, saying on Thursday that Treasury Secretary Scott Bessent will meet Chinese Vice Premier He Lifeng and other senior officials in Madrid next week to continue high-level discussions on trade, economic, and national security issues. During the trip, Bessent will also meet government counterparts in Madrid and London before joining US President Donald Trump for his September 17–19 state visit with Britain’s King Charles.
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 found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
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 stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the 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 in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker 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 from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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