The US dollar index (DXY), which gauges the dollar’s value against six key currencies, has held steady after slight increases in the prior session. As of Thursday, DXY is hovering around 98.80 Asian time. Traders are looking ahead to the weekly jobless claims, annualized GDP, and personal consumption expenditure (PCE) inflation data for fresh insights into the U.S. economic landscape.
The dollar has found some support as geopolitical tensions between the US and Europe have started to ease. According to Bloomberg, President Trump mentioned he would step back from the threat of imposing tariffs on goods from European nations that oppose Greenland. He previously stated there was “no going back” on his plans for Greenland and hinted at a potential imposition of new 10% tariffs on eight EU countries.
Additionally, Trump asserted that the U.S. and NATO have established a basic framework for a future agreement regarding Greenland, though he did not detail what that framework entails. As such, the implications of this agreement remain somewhat ambiguous.
While market expectations still suggest a 50 basis point rate cut this year, Federal Reserve officials have conveyed that there is no pressing need to adjust monetary policy unless clear indications show that inflation is heading sustainably toward the 2% target.
US Dollar Frequently Asked Questions
The United States Dollar (USD) serves as the official currency of the U.S. and acts as the predominant currency for various other nations, often used alongside local money. It’s actually the most traded currency in the entire world, making up over 88% of the global foreign currency trading volume, or about $6.6 trillion daily on average, according to 2022 statistics. Post-World War II, the U.S. dollar took over as the world’s reserve currency, having been backed by gold until the Bretton Woods agreement dismantled the gold standard in 1971.
What really drives the value of the U.S. dollar is primarily the monetary policy set by the Federal Reserve System (Fed). The Fed’s main goals are to maintain price stability—essentially managing inflation—and to promote maximum employment. To accomplish these, the Fed adjusts interest rates. If inflation rises swiftly, exceeding the 2% target, the Fed will typically raise interest rates to bolster the dollar’s value. Conversely, if inflation dips below 2% or unemployment rises too high, cutting rates becomes a viable option, which can then negatively impact the dollar.
In some extreme situations, the Federal Reserve might opt to print additional dollars and implement quantitative easing (QE). This is a strategy where the Fed significantly boosts the credit flow in a financially stalled system—a bit of a last resort when banks are hesitant to lend to one another due to concerns over defaults. QE was notably the approach taken during the Great Financial Crisis of 2008, involving the Fed buying U.S. Treasuries from financial institutions. This usually results in a weaker dollar.
On the flip side, quantitative tightening (QT) occurs when the Fed ceases purchasing bonds from financial institutions and doesn’t reinvest the principal from maturing bonds. This aspect typically supports an increase in the dollar’s value.
