US Dollar Index softens to near 98.50 post-Fed rate cut, Jobless Claims data in focus
- US Dollar Index declines to around 98.55 in Thursday’s Asian session.
- Fed decided to lower the benchmark lending rate by a quarter point for the third consecutive time.
- Traders await the release of the US weekly Initial Jobless Claims data on Thursday.
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 negative note near 98.55 during the Asian trading hours on Thursday. The DXY extends the decline after the US Federal Reserve (Fed) delivered a rate cut at its December policy meeting.
As widely expected, the Fed cut its benchmark interest rate by 25 basis points (bps) to a target range of 3.50% to 3.75% at its December policy meeting on Wednesday, the third consecutive reduction since September. Fed Chair Jerome Powell emphasized that the US central bank is now "well positioned to wait and see how the economy evolves" and noted that a future rate hike is not a base-case scenario.
In their latest economic projections, Fed officials penciled in just one rate reduction next year, unchanged from their estimate in September. However, their latest policy statement suggests they’re leaning toward staying on hold in the near term. The DXY weakens as the Fed delivered an outlook that was less hawkish than expected.
Markets are currently pricing in nearly a 78% odds that the Fed will hold interest rates steady next month, compared with a 70% chance just before the rate cut announcement, according to the CME FedWatch tool.
The US weekly Initial Jobless Claims report will be in the spotlight later on Thursday. Analysts expect the number of Americans filing new applications for unemployment benefits to rise to 220,000, compared to 191,000 in the previous reading. However, if the report shows a stronger-than-expected outcome, this could help limit the USD’s losses in the near term.
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.