- The US Dollar could gain ground due to increased risk aversion on Tuesday.
- The improvement in US Treasury yields may contribute to support for the Greenback.
- Vice President Kamala Harris had secured endorsements for the leading candidate for the presidential nomination.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six other major currencies, has recovered daily losses, trading around 104.30 during the early European hours on Tuesday. The higher US Treasury yields contribute support for the Greenback, with 2-year and 10-year yields on US Treasury bonds standing at 4.52% and 4.25%, respectively, at the time of writing.
The US Dollar (USD) faces pressure as expectations rise for a Federal Reserve (Fed) rate cut in September. Last week, Fed Chair Jerome Powell noted that the three US inflation readings this year "add somewhat to confidence" that inflation is on track to meet the Fed’s target sustainably, implying that interest rate cuts might be approaching.
Additionally, Federal Reserve Bank of New York President John Williams remarked on Friday that the long-term trends leading to lower neutral interest rates before the pandemic are still in effect. Williams stated, "My own Holston-Laubach-Williams estimates for r-star in the United States, Canada, and the Euro area are about the same level as they were before the pandemic," as reported by Bloomberg.
In US politics, Democrats rallied behind Vice President Kamala Harris as the leading candidate for the presidential nomination. NBC News projected that Harris had secured endorsements from a majority of the Democratic party’s pledged convention delegates. The threshold for securing the nomination is 1,976 delegates, and NBC estimates that Harris has received the support of 1,992 delegates, either through spoken or written endorsements.
Traders will likely observe the data releases of the Global Purchasing Managers Index (PMI) and Gross Domestic Product (GDP) later this week. These figures may offer fresh insights into the economic conditions of the United States (US).
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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