US Dollar Index trades higher ahead of US markets opening, Fed speeches eyed
- The US Dollar Index rises to near 97.85 as investors look beyond the US Supreme Court’s ruling against Trump’s tariff policy.
- US President Trump threatens additional levies if countries dishonour trade deals.
- Fed’s Waller supports holding interest rates steady in the March policy meeting.
The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, is up 0.15% higher to near 97.85 in the European trading session on Tuesday. The US Dollar (USD) trades higher as market participants digest the United States (US) Supreme Court’s (SC) ruling against President Donald Trump’s tariff policy.
On Friday, the US SC accused President Donald Trump of abusing the International Emergency Economic Powers Act (IEEPA) to back his tariff agenda and invalidated additional duties. The initial impact of SC’s verdict turned out negative for the US Dollar as it raised concerns over the US trade policy outlook.
However, US President Trump announced 15% global tariffs to offset SC’s ruling, which turned out to be a message that Washington has several measures to keep additional import duty pressure afloat.
This has reduced uncertainty surrounding the US trade policy outlook. In addition, President Donald Trump has also threatened steeper levies on countries if they intend to capitalize on SC’s ruling and refrain from honouring trade deals.
"Any Country that wants to ’play games’ with the ridiculous supreme court decision, especially those that have ’Ripped Off’ the U.S.A. for years, and even decades, will be met with a much higher Tariff, and worse, than that which they just recently agreed to. BUYER BEWARE!!!," Trump wrote on Truth.Social.
Going forward, the next major trigger for the US Dollar will be speeches from a slew of Federal Reserve (Fed) officials who are scheduled to speak later in the day. Investors will closely monitor Fed speeches to get fresh cues on the US interest rate outlook.
On Monday, Fed Governor Christopher Waller expressed willingness to support leaving interest rates on hold in the March meeting due to surprisingly upbeat job data. “Unexpectedly strong January job growth of 130K positions was a surprise to the upside, and if that continues in February, my [Waller] view of appropriate monetary policy may tilt toward a pause at our [March] upcoming meeting," Reuters reported.
According to the CME FedWatch tool, traders are confident that the Fed will leave interest rates unchanged in its upcoming policy meetings in March and April.
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.