The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, currently trades near 98.30 during the Asian trading hours on Wednesday. The DXY attracts some sellers due to easing tensions in the Middle East. The US April ADP Employment Change report will be the highlight later on Wednesday.
US President Trump announced on Tuesday that he was pausing the US operation to escort commercial ships through the Strait of Hormuz “for a short period of time,” citing what he said was “great progress” toward an agreement with Iran. His statement came after US Secretary of State Marco Rubio asserted that the US had concluded combat operations against Iran and was fully focused on the new mission.
Data released by the Institute for Supply Management (ISM) on Tuesday showed that the Services Purchasing Managers Index (PMI) declined to 53.6 in April from 54.0 in March. This figure came in better than the forecast of 53.7.
The US Federal Reserve (Fed) decided to leave the benchmark federal funds rate at a target range of 3.50% to 3.75% following its April policy meeting. This marked the third consecutive hold as policymakers navigate persistent inflation and rising energy costs driven by conflict in the Middle East. Fed Chair Jerome Powell said last week during the press conference that the US central bank could drop its easing bias as soon as its June meeting.
All eyes will be on the US April jobs data later on Friday. Economists expect the US economy to have added 60,000 jobs in April, while the Unemployment Rate is estimated to remain steady at 4.3 during the same period. A sign of labor market deterioration could weigh on the US Dollar 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.
