The US Dollar Index (DXY), which gauges the dollar’s value against a basket of six other currencies, was hovering around 100.05 during Thursday’s Asian trading hours, showing a decline. This drop is linked to the ongoing U.S. government shutdown, which has now set a record for the longest duration in history, leading to rising fears of its economic impact.
The shutdown began on October 1 after Congress was unable to resolve funding disputes. Over a month later, no resolution is in sight. This uncertainty and the extended nature of the shutdown are negatively affecting the DXY. The Senate isn’t scheduled to vote on a bill aimed at reopening the government on Thursday, having rejected it for the fourteenth time on Tuesday.
Meanwhile, private sector job creation picked up in October, partly compensating for the lack of formal federal jobs data. According to Automatic Data Processing (ADP), U.S. private payrolls saw an increase of 42,000 jobs in October, contrasting with a revised drop of 29,000 in September. This figure exceeded the expectation of a 25,000 job increase.
Last week, the U.S. central bank cut interest rates for the second consecutive time. Fed Chairman Jerome Powell noted a “very modest” cooling in the labor market but did not indicate more significant changes. He emphasized that future rate cuts at the upcoming December meeting are not guaranteed.
Federal Reserve President Stephen Milan described the job gains reported for October as a “welcome surprise” on Wednesday. However, he suggested that the current policy may be overly strict and hinted that additional rate cuts could be warranted in December, remarking that maintaining a tight policy could introduce unnecessary risks.
Traders are likely awaiting insights from Thursday’s speeches by several Fed officials, including Michael Barr and John Williams. Hawkish commentary from these policymakers could temporarily strengthen the dollar.
US Dollar Frequently Asked Questions
The United States Dollar (USD) serves as both the official currency of the U.S. and a widely used currency in various other countries, often circulating alongside local currencies. It stands as the most traded currency globally, comprising more than 88% of foreign currency trading volume—around $6.6 trillion daily, based on 2022 data. Following World War II, it replaced the British pound as the primary reserve currency. For most of its existence, the dollar was backed by gold until the gold standard was abolished in 1971 by the Bretton Woods agreement.
A key factor affecting the value of the US dollar is the monetary policy dictated by the Federal Reserve System (Fed). The Fed’s dual mandate includes ensuring price stability and promoting full employment. Interest rates are the main tool used to achieve these goals. When inflation exceeds the Fed’s 2% target, interest rates might be raised to bolster the dollar’s value. Conversely, if inflation dips below that threshold or unemployment rises too high, the Fed could lower interest rates, which may weaken the dollar.
In extreme cases, the Federal Reserve may print more dollars and engage in quantitative easing (QE) to stimulate a stagnant financial system. This approach, a last resort typically employed when traditional interest rate cuts aren’t effective, was notably used during the credit crunch of 2008. It involves the Fed creating more dollars to purchase U.S. Treasuries, primarily from financial institutions, often leading to a weaker dollar.
Quantitative tightening (QT) represents the opposite action, where the Federal Reserve stops buying bonds from financial entities and does not reinvest the principal from maturing bonds. This generally has a positive effect on the US dollar.
