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 positive note around 99.55 during the Asian trading hours on Wednesday. The DXY edges higher amid hopes for the end of the US government shutdown. Traders will keep an eye on the Fedspeak later on Wednesday for more cues about the US interest rate.
The US Senate approved a compromise on Monday that would end the longest government shutdown in US history. The funding bill is headed to the House for a final vote as soon as Wednesday. If it passes in both chambers of Congress, it will head to US President Donald Trump to be signed into law. A potential end to the US government shutdown lifts the US Dollar against its rivals.
Nonetheless, traders believe that the resumption of economic data will point to a slowing economy and that would prompt the Federal Reserve (Fed) to reduce interest rates in December. This, in turn, might cap the upside for the DXY in the near term.
“When the government is closed, the news stream is non-existent. With the government going to reopen, I think we’re going to begin seeing more cracks,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.
Data last week showed the US consumer sentiment slumped to its lowest level in three and a half years in early November. Additionally, private employers shed an average of 11,250 jobs per week on average in the four weeks ended October 25, the Automatic Data Processing (ADP) showed on Tuesday.
Traders will take more cues from Fed policymakers later in the day. The Fed’s John Williams, Anna Paulson, Christopher Waller, Raphael Bostic, Stephen Miran and Susan Collins are set to speak. Any hawkish remarks could boost the USD, while dovish comments could drag the DXY lower.
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.