The US dollar is trading higher across the board on Thursday as investors scaled back their bets on a Federal Reserve rate cut in December. The US Dollar Index, which measures the dollar’s value against a basket of similar currencies, hit the 100.35 to 100.50 area, capping bulls in May, August and early November.
The release of the minutes of the latest Fed meeting provided fresh stimulus to the already strong US dollar, which drew support from risk-off market sentiment in the previous days.
Markets are reducing their hopes for a rate cut in December
On October 29, the Federal Reserve cut interest rates by a quarter of a percentage point. However, meeting minutes revealed wider than expected disagreement within the committee, with “many” policymakers opposing the decision. This has raised doubts about the possibility of further monetary easing in December.
Moreover, the dollar rose to a 10-month high against the Japanese yen, as news that Prime Minister Takaishi’s government is preparing a stimulus package that could exceed 20 trillion yen (US$129 billion) reinforced concerns about Japan’s public finances.
In the US, the focus on Friday is on the delayed US non-farm payrolls report for September, which is expected to show that the US economy created 55,000 new jobs during the month. These numbers improve the increase of 22,000 seen in August, but are still well below the 2024 average.
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.
