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 stronger note near 98.00 during the Asian trading hours on Friday. Traders brace for the key US economic data later on Friday for more clues on the interest rate path.
The stronger-than-expected US economic data and hawkish Federal Reserve (Fed) minutes could lift the DXY in the near term. According to minutes released on Wednesday from the January Fed meeting, officials split on where the interest rates should go. Several policymakers stated that rate hikes could be on the table and wanted the post-meeting statement to more closely reflect “a two-sided description of the Committee’s future interest rate decisions.”
Data released by the US Department of Labor (DOL) on Thursday showed that the Initial Jobless Claims declined to 206,000 for the week ending February 14. This figure came in below the market consensus of 225,000 and down from the previous week’s revised 229,000.
Minneapolis Fed President Neel Kashkari said the labor market has remained “pretty resilient” and that the central bank is close to both mandates of maximum employment and stable prices. Meanwhile, San Francisco Fed President Mary Daly stated that the monetary policy is in a good place.
The preliminary reading of the US Gross Domestic Product (GDP) for the fourth quarter (Q4) and the Personal Consumption Expenditures (PCE) data will be the highlights later in the day. In case of weaker-than-expected outcomes, this could drag the US Dollar lower against its rivals.
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-gains-momentum-to-near-9800-ahead-of-us-gdp-and-pce-data-202602200235
