US dollar index rises above 100.50, upside potential looks limited ahead of US PCE data

VaselineSeptember 27, 2024

0 3 minutes read

US dollar index rises above 100.50, upside potential looks limited ahead of US PCE data

The US dollar index is gaining traction around 100.65 in the Asian session on Friday.
US durable goods orders remained flat in August; The US economy grew at an annual rate of 3.0% in Q2.
The US Fed’s dovish tone continues to weigh on the greenback.

The US dollar index (DXY) is back near 100.65 during Asian trading hours on Friday. Expectations that the Federal Reserve (Fed) will lower its borrowing costs in the future continue to undercut the USD broadly.

The Fed decided to cut interest rates last week by half a percentage point. Fed Chairman Jerome Powell noted that the 50 basis point (bps) cut was a “recalibration” of rates aimed at maintaining strength in the labor market while inflation moves sustainably toward the Fed’s 2 percent target.

Fed officials expect to cut interest rates further in the coming months, but they are not on a set path. This, in turn, could drag DXY lower in the short term. Markets are now pricing in a nearly 48.8 percent chance of another excessive cut of half a percentage point, while the odds of 25 bps are 51.2 percent, according to CME Group’s FedWatch tool.

Upbeat U.S. economic data on Thursday provided some support for the greenback, but a rally faded as traders turned their attention to U.S. inflation data due later on Friday. Analysts estimate that the price index of personal consumption expenditures (PCE) will increase by 2.3% per year in August, and the core PCE will increase by 2.7% per year in the same period.

Data released by the US Census Bureau showed that US durable goods orders were unchanged in August from 9.9% previously, above the market consensus of 2.6%. Meanwhile, final US gross domestic product (GDP) rose at an annual rate of 3.0% in the second quarter (Q2), as previously estimated.

Fed Governor Lisa Cook said Thursday that she approved the 50 bps interest rate cut last week as a way to address increased “downside risks” to employment. Fed Governor Adriana Kugler stayed with the Fed’s dovish tone, saying: “We strongly supported last week’s decision by the Federal Open Market Committee (FOMC) to cut the federal funds rate by 50 basis points… If conditions continue to evolve in the direction thus traveled. away, then additional discounts will be appropriate.” The accommodative stance of the US central bank contributes to the decline in the US dollar index.

Frequently asked questions about US dollars

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 banknotes. It is the world’s most heavily traded currency, accounting for more than 88% of total global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, as of 2022. After World War II world, the USD has taken 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 disappeared.

The most important factor influencing the value of the US dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to ensure price stability (inflation control) and to promote full employment. Its main tool for achieving these two objectives is the adjustment of interest rates. When prices rise too fast and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the value of the USD. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which affects interest rates.

In extreme situations, the Federal Reserve can also print more dollars and engage in 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 (for fear of default). It is a last resort when simply lowering interest rates is unlikely to achieve the desired result. It was the Fed’s preferred weapon to combat the credit crunch that occurred during the Great Financial Crisis of 2008. This involves the Fed printing more dollars and using them to buy US government bonds, mainly 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 of maturing bonds it holds in new purchases. It is usually positive for the US dollar.

VaselineSeptember 27, 2024

0 3 minutes read

Frequently asked questions about US dollars

Vaseline

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