The US Dollar Index (DXY) is soaring, surpassing 98.50, as traders eagerly await the University of Michigan Consumer Sentiment Index for December. This surge comes amidst rising expectations of US Federal Reserve (Fed) rate cuts, following the unexpectedly cooled US Consumer Price Index (CPI) inflation in November. The CME FedWatch tool indicates a 73.3% probability of rates being held at the Fed’s January meeting, down from 75.6% a day earlier, while the likelihood of a 25-basis-point rate cut has risen to 26.6% from 24.4% a day ago.
The US Bureau of Labor Statistics (BLS) released data on Thursday, revealing that the US Consumer Price Index (CPI) eased to 2.7% in November, below the market consensus of 3.1%. Meanwhile, the US core CPI, excluding volatile food and energy prices, rose by 2.6%, missing the expectation of 3.0%. This figure marks the slowest pace since 2021.
US President Donald Trump has made headlines by stating that the next chairman of the Federal Reserve (Fed) will be someone who believes in lower interest rates "by a lot." He further noted that he will soon announce a successor to current Fed Chair Jerome Powell.
The US Dollar (USD) is the official currency of the United States of America and the 'de facto' currency of several other countries. 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 significant factor impacting the US Dollar's value is monetary policy, shaped by the Federal Reserve (Fed). The Fed has two mandates: achieving price stability (controlling inflation) and fostering full employment. Its primary tool is adjusting interest rates. When inflation rises above the Fed’s 2% target, the Fed raises rates, strengthening the USD. Conversely, when inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which can weaken the Greenback.
In extreme situations, the Federal Reserve can employ quantitative easing (QE), a non-standard policy measure used when credit has dried up. QE involves the Fed printing more Dollars and buying US government bonds, predominantly from financial institutions. This process usually leads to a weaker US Dollar. Conversely, quantitative tightening (QT) is the reverse process, where the Fed stops buying bonds and does not reinvest the principal from maturing bonds. QT is typically positive for the US Dollar.
