US Dollar Index weakens near 98.50 as focus shifts to Q3 GDP data
- US Dollar Index depreciates as traders adopt caution ahead of looming US Q3 GDP Annualized for Q3 due on Tuesday.
- Fed’s Hammack said policy is well-positioned to pause and assess the impact of 75-basis-point rate cuts.
- CME FedWatch suggests a 79.0% chance of a January hold, while 25-basis-point cut odds fell to 21.0%.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is losing ground after three days of gains and trading around 98.60 during the Asian hours on Monday. Traders await Tuesday’s release of the US third-quarter Gross Domestic Product Annualized for the third quarter, which will offer insight into economic health and the timing of the Federal Reserve’s next rate moves.
The US Dollar (USD) may regain its ground due to cautious sentiment surrounding the Federal Reserve’s (Fed) policy outlook. Federal Reserve Bank of Cleveland President Beth Hammack said on Sunday that monetary policy is in a good position to pause and assess the effects of the 75-basis-point (bps) rate cuts on the economy during the first quarter, according to Bloomberg.
The CME FedWatch tool indicated a 79.0% probability of rates being held at the Fed’s January meeting, up from 75.6% a week earlier. Meanwhile, the likelihood of a 25-basis-point rate cut has fallen to 21.0% from 24.4% a week ago.
The University of Michigan reported on Friday that the Consumer Sentiment Index was revised down to 52.9 in December from 53.3 prior. Consumer Expectations Index fell to 54.6 from 55.0. Meanwhile, One-year Inflation Expectations were revised up to 4.2% from 4.1% in both the initial estimate and the prior month.
Traders are also focusing on further comments from US President Donald Trump, who said last week that the next Chair of the Federal Reserve (Fed) will be someone who believes in significantly lower interest rates. Meanwhile, Fed Governor Christopher Waller, who is under consideration for the role, said, “Because inflation is still elevated, we can take our time - there’s no rush to get down. We can steadily bring the policy rate down toward neutral.”
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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