The US Dollar Index (DXY), which shows the dollar’s performance against six major currencies, has increased for the third consecutive day, hovering around 98.90 on Wednesday morning in Asia. The Federal Open Market Committee (FOMC) minutes from the September policy meeting are expected to be a focal point in the upcoming North American discussion.
The dollar is drawing support from a heightened demand for safe-haven currencies, fueled by a bleak outlook for potential resolutions, mainly due to President Trump’s suggestion of large-scale federal employee layoffs and the ongoing government shutdown. This scenario has naturally pushed the demand for safe currencies higher. However, Democrats argue that the conflict surrounding government shutdowns is escalating and quite unyielding.
Still, a dovish sentiment regarding the Federal Reserve’s policy direction appears widespread, possibly exerting downward pressure on the dollar. The CME Fed Watch Tool currently indicates nearly a 95% probability of a 25 basis point cut in October, with an 83% chance of another cut in December.
On Tuesday, Federal Reserve Board member Stephen Milan highlighted that inflation could primarily stem from “population growth.” He further noted that monetary policy might need to be relaxed ahead of cuts in neutral interest rates.
Minneapolis Fed President Neil Kashkari took a more tempered stance than some other Fed Presidents on Tuesday, mentioning it might be premature to assess whether tariff-induced inflation is problematic. Yet, he expressed optimism about the labor market and hopes for a rebound in the stagnant job creation numbers in the US.
Frequently Asked Questions about US Dollar
The US dollar (USD) serves as the official currency of the United States and is commonly used in many other nations alongside their local currencies. It is the most traded currency globally, accounting for over 88% of daily foreign currency trading volumes, averaging around $6.6 trillion. Post World War II, it surpassed the British pound as the primary global currency. Historically, the dollar was backed by gold until the gold standard was abolished with the Bretton Woods Agreement in 1971.
The most significant influence on the dollar’s value is the monetary policy set by the Federal Reserve (Fed). Its dual responsibilities include maintaining price stability (controlling inflation) and promoting full employment. Interest rate adjustments are the primary tools for achieving these aims. If inflation surges beyond the Fed’s 2% target, it may increase interest rates to support the dollar’s value. Conversely, if inflation falls below 2% or if unemployment is too high, the Fed could lower interest rates, which typically detracts from the dollar’s strength.
In extreme situations, the Federal Reserve might decide to print more money and employ Quantitative Easing (QE). QE involves significantly increasing credit flow in a stagnant financial system and is utilized when banks hesitate to lend due to concerns about counterparty defaults. It’s a last resort when merely lowering interest rates seems insufficient. This approach was notably used during the 2008 financial crisis, allowing the Fed to inject liquidity primarily by purchasing US government bonds from financial institutions. Over time, QE generally results in a weaker dollar.
Quantitative tightening (QT) is the opposite action where the Federal Reserve halts bond purchases from financial institutions and does not reinvest the principal of matured bonds into new purchases. This usually supports the dollar’s value.
