- The US Dollar consolidates gains at 97.85, after bouncing from 97.20 lows on Wednesday.
- Cautious rhetoric by Fed officials has curbed hopes of a steep easing cycle and is providing support for the USD.
- Later on Thursday, US GDP and more Fed speakers will drive US Dollar pairs.
The US dollar remained practically flat at 97.85 on the European morning trade on Thursday, consolidating gains after a 0.65% rally on Wednesday, as Federal Reserve officials warned against hopes of back-to-back interest rate cuts.
San Francisco Fed President, Mary Daly, reiterated the view of Chairman Powell the day before, suggesting that the next interest rate cut might not be imminent. Daly acknowledged the need for lower interest rates but stated that the balance between the two mandates, employment and inflation, requires proceeding with caution.
Later today, investors will be attentive to the final reading of the US Q2 GDP, which is expected to confirm that the economy grew at a 3.3% annualized rate. These figures and more speeches from Fed policymakers are likely to drive US Dollar crosses later today.
The highlight of the week, however, will be the US Personal Consumption Expenditures (PCE) Price Index report due on Friday. Investors will be eager to assess the impact of trade tariffs on consumer prices for a better assessment of the Fed’s near-term monetary policy decisions. Any divergence from the market consensus is likely to have a significant impact on the USD.
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.
Source: https://www.fxstreet.com/news/us-dollar-index-dxy-holds-gains-near-9800-with-us-gdp-on-tap-202509250837
