The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is remaining flat after recovering daily losses and trading around 97.90 during the European hours on Wednesday.
However, the Greenback faced challenges, which could be attributed to growing expectations of two rate cuts by the Federal Reserve (Fed) in 2026. Volumes are expected to be thin due to holiday-shortened trading.
The yields on the 2- and 10-year US Treasury note rebounds to near 3.53% and 4.16%, respectively, on Wednesday. However, the US yields may pull back as traders continue to price in two Federal Reserve (Fed) rate cuts in 2026 despite stronger-than-expected economic data.
The preliminary US annualized GDP grew 4.3% in the July–September period, beating expectations of 3.3% and the prior quarter’s 3.8% expansion. Meanwhile, the core PCE Price Index rose 2.9% quarter-over-quarter, in line with forecasts.
White House Adviser Kevin Hassett said on Tuesday that the Fed is not cutting interest rates quickly enough, even though the US economy grew at a much faster-than-expected pace in the third quarter, according to a CNBC report.
Moreover, Fed Member of the Board of Governors Stephen Miran said on Monday that failing to ease policy would raise recession risks, adding that the need to dissent for 50 basis points diminishes over time as rates are reduced.
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.
