US Dollar Index (DXY) retreats below 98.00 ahead of the Trump-Putin meeting
- The Dollar pares gains on Friday amid hopes of some progress towards a peace agreement in Ukraine.
- The moderate risk appetite ahead of the Trump-Putin meeting is weighing on the USD.
- Later today, US Retail Sales and Univ. Michigan Consumer Inflation Expectations might set the USD's near-term direction.
The US Dollar remains trading within a descending channel. The bullish reaction to the stronger-than-expected PPI figures seen on Thursday was capped at the top of the channel, around 98.35, and the index has given away practically all post-PPI gains on Friday, returning to levels below 98.00.
A moderate risk appetite, on hopes that the Trump-Putin meeting due later today in Alaska will deliver some advance towards the end of the Ukrainian war, is supporting the Euro and increasing pressure on the US Dollar.
The Dollar pulls back after the PPI shock
On Thursday, US wholesale prices showed their largest increment in the last three years, confirming that the higher tariffs are starting to hit inflation. The figures cooled some of the hopes for immediate Fed cuts triggered by the benign CPI figures seen earlier on the week, and sent the US Dollar higher across the board.
As the dust from the PPI shock settles, and investors realise that futures markets are still pricing more than 90% chances of a 25 bps rate cut in September, bearish pressure has returned to the US Dollar.
In the calendar today, US Retail Sales will provide further insight about the impact of tariffs on consumer spending, which, together with the University of Michigan Consumer Inflation Expectations, is likely to set the tone for the US Dollar.
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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