US Dollar Index softens to below 98.50 on trade jitters
- The US Dollar Index trades on a negative note around 98.45 in Monday’s early European session.
- Trump pushed for a minimum tariff of 15% to 20% in any deal with the EU.
- The UoM Consumer Sentiment Index rose more than expected in July's flash estimate.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, edges lower to near 98.45 during the early European session on Monday. Concerns over the economic impact of US President Donald Trump’s tariff policies, the US fiscal and debt outlook, and the Fed’s independence drag the USD lower against its rivals.
Investors will closely monitor the headlines surrounding US tariff policies. The Financial Times reported last week that Trump was pushing tariffs of 15% to 20% on European Union (EU) products. Meanwhile, US Commerce Secretary Howard Lutnick said on Sunday he was confident the US could secure a trade deal with the EU, but said August 1 was a hard deadline for tariffs to kick in.
Furthermore, dovish remarks from the US Federal Reserve (Fed) officials might contribute to the DXY downside. Fed Governor Christopher Waller said that policymakers should cut interest rates in the July meeting to boost a job market that looks to be weakening. Waller further stated that the Fed shouldn't "wait until the labor market deteriorates before we cut the policy rate."
Analysts expect the Fed will maintain its current rates at the end of this month, with a chance standing at 94% for a hold and 6% for a 25 basis points (bps) rate cut.
On the other hand, the better-than-expected US economic data released on Friday might help limit the USD’s losses. The University of Michigan's (UoM) preliminary Consumer Sentiment Index climbed to 61.8 in July versus 60.7 prior. This reading came in above the market consensus of 61.5.
The US Housing Starts increased 4.6% to an annualized rate of 1.32 million homes in June, up from an almost 10% slide in May, according to government figures released Friday. This figure was stronger than the 1.263 million homes expected (revised from 1.256 million).
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.