The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, continues its winning streak for the fifth straight session and is trading around 100.30 during Asian hours on Thursday. Traders await the release of the US September non-farm payrolls (NFP) report later on Thursday, to gain new momentum on the Federal Reserve’s policy outlook.
The U.S. Bureau of Labor Statistics (BLS) said it will not release its October regular employment report because household survey data cannot be collected retrospectively. The agency added that the missing data will be incorporated into the delayed November report instead.
The dollar rose more than 0.5% in the previous session, approaching the five-month high of 100.36 reached on November 5, as markets trimmed their expectations for another interest rate cut by the Federal Reserve in December following the minutes of the Federal Open Market Committee (FOMC) meeting.
Minutes from the October 28-29 Federal Open Market Committee meeting indicated that Fed officials are divided and cautious about the future path of interest rates. Most respondents indicated that further rate cuts would likely be appropriate over time, but several indicated that they did not necessarily see a cut in December as appropriate.
CME’s FedWatch tool indicates that financial markets are now pricing in a 33% probability that the Fed will cut its benchmark overnight borrowing rate by 25 basis points at its December meeting, down from the 63% probability that markets had priced in a week ago.
Frequently asked questions about the US dollar
The US dollar (USD) is the official currency of the United States of America, and the “de facto” currency of a large number of other countries where it is traded alongside local banknotes. It is the world’s most traded currency, accounting for more than 88% of total global forex trading volume, or an average of $6.6 trillion in transactions per day, according to 2022 data. After World War II, the US dollar took the place of 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 disappeared.
The most important factor affecting the value of the US dollar is monetary policy, which is shaped by the Federal Reserve. The Fed has two missions: achieving price stability (controlling inflation) and promoting full employment. The basic tool for achieving these two goals is adjusting interest rates. When prices rise too quickly and inflation is above the Fed’s 2% target, the Fed will raise interest rates, which helps the value of the US dollar. When the inflation rate falls below 2% or when the unemployment rate is very high, the Fed may cut interest rates, which affects the dollar.
In extreme cases, the Fed could also print more dollars and activate quantitative easing (QE). Quantitative easing is the process by which the Federal Reserve dramatically increases the flow of credit into a stuck financial system. It is a non-standard policy measure used when credit dries up because banks will not lend to each other (due to fear of the counterparty defaulting). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It has been the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis of 2008. This involves the Fed printing more dollars and using them to buy U.S. government bonds mostly from financial institutions. Quantitative easing usually leads to a weakening of the US dollar.
Quantitative tightening (QT) is the reverse process whereby the Fed stops purchasing bonds from financial institutions and does not reinvest capital from bonds it holds outstanding in new purchases. It is usually positive for the US dollar.
