US Dollar Index jumps to near 104.30 as US political uncertainty dampens market sentiment
|- The US Dollar rises further as market participants see Donald Trump winning Presidential elections this year.
- Investors expect that the Fed cut interest rates twice this year.
- Fed Williams and Bostic are scheduled to speak on Friday.
The US Dollar (DXY), which tracks the Greenback’s value against six major currencies, extends its upside to near 104.30 in Friday’s European session after a sharp recovery from an almost four-month low of 103.65 this week. The US Dollar’s (USD) appeal improves amid deepening speculation that the United States (US) Republican Party will come into power in presidential elections scheduled later this year.
The assassination attempt on Donald Trump and expectations that US President Joe Biden could drop his re-election bid have increased the possibility of Republicans coming out victorious in elections.
Donald Trump is known for advocating tight trade policies, which lower the supply of the US Dollar in global markets and strengthen its appeal.
Meanwhile, the 10-year US Treasury yields have also recovered to near 4.21%. However, the broader outlook for the US Dollar and bond yields remains uncertain as investors see the prospects of the Federal Reserve (Fed) beginning to reduce interest rates in September as certain.
Cooling inflationary pressures and upside risks to US labor market strength have prompted Fed rate-cut bets. According to the CME FedWatch, 30-day Federal Funds Futures pricing data shows that traders have priced in a rate-cut move in September and a follow-up one in November or December.
In Friday’s session, Fed officials New York Fed Bank President John Williams and Atlanta Fed Bank President Raphael Bostic are lined up for speech. Investors will look for cues about whether two rate cut expectations are appropriate.
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.
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