United States Dollar Index weakens ahead of critical US inflation reports
- US PPI and CPI reports will dictate Federal Reserve monetary policy and interest rate expectations.
- Strong US jobs data has traders pricing in over a 60% chance of a rate hike.
- Reuters poll indicates that the Fed will hold interest rates steady through year-end, defying market hike expectations.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is losing ground for the fourth consecutive day and trading around 98.70 during Asian hours on Thursday.
Market participants are closely watching the upcoming US Producer Price Index data due to be released on Thursday and Consumer Price Index data on Friday, as these inflation reports could provide vital hints regarding the Federal Reserve's (Fed) monetary policy outlook ahead of its meeting next week.
Following recent stronger US jobs data, traders have increased their bets on an interest rate hike, with the CME FedWatch Tool pricing in over 60% odds for a rate increase at the central bank's upcoming policy meeting.
However, according to a majority of economists in a Reuters poll, the Federal Reserve will hold its interest rate steady at its September 15-16 meeting and for the rest of this year, once again defying market expectations for a series of hikes.
Economic data have mostly come in strong in recent weeks, and several economists noted that the August Consumer Price Index data will be crucial for solidifying their outlook on future interest rates.
Bond outflows deepen as higher yields sap demand
Strategists at BNY observe that investor risk appetite has cooled, noting that "iFlow Mood narrowed at a faster pace as investors reduced core sovereign bond exposure more aggressively than global equities." They add that "higher global yields are increasingly weighing on bond flows," underscoring how rising rate pressures are prompting a more pronounced pullback from core sovereign debt relative to stock markets.
Technical Analysis: DXY holds below moving averages
In the daily chart, Dollar Index Spot trades at 98.70, keeping a bearish near-term tone as it holds below both the nine-day and 50-day Exponential Moving Averages (EMAs). The short-term EMA remains beneath the longer EMA, while the 14-day Relative Strength Index (14) at about 37 stays in bearish territory, suggesting ongoing downside pressure despite some stabilization in the FXS Fed Sentiment Index around 125.72.
On the topside, initial resistance is aligned with the nine-day EMA, with a more significant cap at the 50-day EMA, which together outline the band the index must reclaim to alleviate the current bearish bias. In the absence of identifiable technical supports from the provided dataset, traders may look to recent lows and psychological round numbers below 98.75 for potential demand zones, while any recovery attempts are likely to struggle as long as price trades under the clustered EMAs.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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.