United States Dollar Index strengthens above 101.00 as traders ramp up bets on Fed rate hike
- US Dollar Index attracts some buyers to around 101.30 in Wednesday’s early European session.
- Traders await the Fed Chair Kevin Warsh's speech on Wednesday ahead of the key US June employment report.
- Resilient US economic data and Fed hawkish tone support the US Dollar.
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 101.30 in the early European trading hours on Wednesday. The DXY gains momentum amid optimism over US economic growth and the prospect of Federal Reserve (Fed) interest rate hikes. Fed Chair Kevin Warsh is set to speak at the European Central Bank Forum on Central Banking in Portugal on Wednesday.
The Fed held its benchmark interest rate steady in a target range of 3.50% to 3.75% at its June policy meeting. The central bank's update also removed a statement hinting that it was leaning toward lowering interest rates in the future. A more hawkish turn at the Fed’s June meeting under new Fed Chair Kevin Warsh has led traders to increase bets on rate hikes this year
Traders brace for the key US employment report later on Thursday, which could offer some hints about the Fed’s monetary policy stance. Economists forecast a rise of 110,000 jobs in June, while the Unemployment Rate is projected to hold steady at 4.3% during the same period.
Three consecutive months of stronger-than-expected Nonfarm Payrolls (NFP) gains have supported the Fed's hawkish shift. If the June report shows a better-than-estimated outcome, this could support the DXY. However, any signs of weakening in the labor market could prompt a more dovish rethink of the monetary path, which could drag the US Dollar lower against its rivals.
Fed funds futures have priced in nearly a 69% chance of a rate hike by September, according to the CME FedWatch tool.
"All the evidence and the Fed's view itself is that the labor market is proving to be resilient, and therefore in terms of the Fed's dual mandate, the labor market is clearly not giving any signal that they should be thinking about cutting rates," said Ray Attrill, head of FX strategy at National Australia Bank (NAB).
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.