US Dollar Index regains ground near 97.50 as investors look beyond US tariff uncertainty
- The US Dollar turns slightly positive as investors digest US trade policy uncertainty.
- The US Supreme Court invalidated Trump’s tariff policy, being backed by emergency economic powers.
- Traders expect the Fed to leave interest rates unchanged in the March and April policy meetings.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, attracts bids after a weak opening around 97.50 and turns slightly positive to near 97.75 during the European trading session on Thursday.
The US Dollar (USD) recovers as investors look beyond the United States (US) Supreme Court’s (SC) ruling against President Donald Trump’s tariff policy, believing that Washington will find a way to keep trade deals with other nations intact.
On Friday, the SC accused US President Trump of invoking emergency economic powers to back his tariff agenda, and invalidated so-called reciprocal duties. In response, Trump announced 10% global duties to maintain tariff pressure on other nations, with whom Washington has signed trade deals.
Meanwhile, US Trade Representative Jamieson Greer also stated on Tuesday that Washington could raise tariffs to 15% or above on some nations from the recently announced 10% duties. However, he didn’t disclose the names of US trading partners that could be charged higher tariffs.
On the monetary policy front, traders seem confident that the Federal Reserve (Fed) will hold interest rates steady in the March and April policy meetings, according to the CME FedWatch tool.
On Wednesday, St. Louis Fed Bank President Albert Musalem said that the current interest rate policy is appropriate to keep balancing both employment and inflation risks.
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.