US Dollar Index posts modest gains to near 97.50 as Fed appears less dovish
- US Dollar Index gains ground around 97.40 in Friday’s early European session.
- Less dovish Fed expectations lift the US Dollar.
- Trump administration asked the Supreme Court to lift lower court rulings that have blocked Trump from firing Cook.
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 stronger note near 97.40 during the early European session on Friday. The DXY edges higher as the Federal Reserve (Fed) delivered an expected rate cut but signaled little urgency to lower borrowing costs quickly in the coming months.
The Fed reduced rates by 25 basis points (bps) on Wednesday, as widely expected, with Chair Jerome Powell characterizing the day's policy action as a risk-management cut in response to the weakening labor market. Powell further stated that the US central bank did not need to rush easing and emphasized a 'meeting-by-meeting' approach to further cuts.
"Investors judged the Fed's guidance less dovish than anticipated," said MUFG analyst Soojin Kim. "Chair Powell highlighted tariff-driven inflation risks and stressed a 'meeting-by-meeting' approach to further cuts, sending the dollar higher,” Kim added.
CNBC reported that a court blocked US President Donald Trump from replacing Fed Governor Lisa Cook, who was appointed by former President Joe Biden. The White House has accused Cook of mortgage fraud involving government-backed loans for residences she bought, but no charges have been brought. Cook has denied the accusations. The renewed concerns over the Fed’s independence could weigh on the DXY against its rivals.
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.