The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, trades on a flat note around 99.55 during the Asian session on Tuesday. The DXY steadies as traders brace for the long-awaited return of US economic data. The US September Nonfarm Payrolls (NFP) report will be the highlight later on Thursday.
Several Fed officials emphasized risks to the labor market. Fed Governor Christopher Waller said that the US central bank should cut the interest rates when policymakers meet in December. Waller added that he’s grown concerned over the labor market and the sharp slowdown in hiring.
Meanwhile, Fed Vice Chair Philip Jefferson noted on Monday that the US labor market is in a “sluggish” state with firms hesitant to hire amid broad shifts in economic policy and interest in how artificial intelligence might be a substitute for new hiring.
Fed funds futures are pricing an implied 43% chance of a 25 basis points (bps) cut at the US central bank’s meeting on December 10, down from a 62% odds a week ago and expectations that a cut was a near certainty a month ago, according to the CME FedWatch tool.
Traders brace for the insight on the Federal Reserve’s (Fed) monetary policy after the end of the longest government shutdown in US history, which delayed the publication of official economic statistics. Later on Tuesday, traders will take more cues from the Fedspeak. Fed’s Michael Barr and Thomas Barkin are set to speak. Any hawkish remarks from policymakers could lift the DXY in the near term.
All eyes will be on the US NFP data on Thursday. Economists forecast around 50,000 jobs added in September, following August’s 22,000 increase. The Unemployment Rate is expected to stay at 4.3% during the same period. If the report comes in weaker than expected, this could exert some selling pressure on the US dollar across the board.
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.