- US Dollar Index trades flat around 98.50 in Tuesday’s Asian session.
- US CPI inflation report for July will be in the spotlight later on Tuesday.
- Trump signed an executive order extending a pause in higher US tariffs on Chinese imports for another 90 days.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, trades on a flat note near 98.50 as traders prefer to wait on the sidelines ahead of a key US inflation report, which is due later on Tuesday. Additionally, the Federal Reserve (Fed) officials are scheduled to speak later in the day, including Thomas Barkin and Jeffrey Schmid.
Traders raise their bets on Fed interest rate cuts after weaker data on US jobs and PMI. Markets will take more cues from the US Consumer Price Index (CPI) inflation report for July, which could help determine whether the US central bank lowers borrowing costs next month.
The headline CPI is forecast to show an increase of 2.8% YoY in July, while the core CPI is projected to show a rise of 3.0% YoY during the same report period. In case of a softer-than-expected outcome, this could prompt the Fed rate cut expectation and drag the DXY lower.
Money market traders are now pricing in around a 90% possibility of a rate cut in the September meeting, while 58 basis points (bps) of reduction are priced in by year-end, implying two quarter-point cuts and around a one-in-three chance of a third.
Positive developments from the US-China trade truce fail to boost the index. US President Donald Trump announced late Monday to delay implementing sweeping tariffs on China, extending another 90 days just hours before the last agreement between the world’s two largest economies was due to expire.
China’s Commerce Ministry said early Tuesday that the officials will suspend adding some US firms to the unreliable entity list for 90 days. The ministry further stated that the country will also suspend adding some US firms to the export control list for 90 days.
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.