US Dollar Index holds positive ground near 99.50 ahead of US PCE inflation data
- US Dollar Index rebounds to around 99.40 in Friday’s Asian session.
- Trump administration considered allowing tariffs of up to 15% for 150 days.
- The focus will be on the US PCE inflation data, due later on Friday.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, edges higher to near 99.40 during the Asian trading hours on Friday. However, the potential upside for the Greenback might be limited, and the DXY is set for a fifth-straight monthly decline on trade and fiscal uncertainty.
Thursday's US weekly Jobless Claims came in weaker than expected, which weighs on the US Dollar. The number of Americans filing new applications for jobless benefits for the week ending May 24 rose to 240K, compared to the previous week of 226K (revised from 227K), the US Department of Labor (DOL) showed on Thursday. This figure came in above the market consensus of 230K. Meanwhile, Continuing Jobless Claims increased by 26K to reach 1.919M for the week ending May 17.
The Wall Street Journal (WSJ) reported late Thursday, “US President Donald Trump's administration is considering an existing law that includes language allowing for tariffs of up to 15% for 150 days.” However, the administration has not made a final decision, and the uncertainty around tariffs might contribute to the DXY’s downside in the near term.
Money markets suggest that traders have priced in nearly 49 basis points (bps) of rate reductions toward the end of the year, following the soft US Initial Jobless Claims report, according to Prime Market Terminal data. San Francisco Fed President Mary Daly said on Thursday that policymakers might cut interest rates twice this year, but rates should remain steady for now to ensure inflation is on track to reach the Fed's 2% target.
Traders will take more cues from the US April Personal Consumption Expenditures (PCE) Price Index report later on Friday, as it might offer some hints about the Federal Reserve’s (Fed) policy trajectory. In case of a stronger-than-expected outcome, this could help limit the DXY’s losses. Additionally, the final reading of the Michigan Consumer Sentiment and the Chicago Purchasing Managers Index (PMI) will be released. San Francisco Fed President Mary Daly is scheduled to speak later in the same day.
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.