US Dollar Index (DXY) hesitates below 98.50 following Friday’s sell-off

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The Dollar trims losses on Monday but remains far from last week's highs near 100.00.
The Greenback lost 1.6% on Friday as the US Nonfarm Payroll report revealed that job creation has been much lower than previously thought.
Friday's employment figures boosted hopes of immediate Fed cuts and undermined speculative demand for the USD.

The US Dollar is trimming some losses on Monday, as the market assimilates Friday’s downbeat employment figures, but remains capped below 98.50, well below last week’s highs near the 100.00 psychological levels.

The Dollar depreciated 1.6% on Friday, after data from the US Labour Department showed that net employment grew by 73,000 in July, below the 110,000 expected, while data from May and June were revised down by 258,000.

These figures boosted expectations that the Fed will find an excuse to lower interest rates in September, a view further supported by the resignation of Fed Governour, Adriana Kugler, also announced on Friday.

Kugler’s resignation provides a golden opportunity for US President Trump, who said that he is “very happy” about the vacancy in the Fed’s board, and that he is likely to fill it with a candidate closer to his interests of a more accommodative monetary policy.

All in all, the Dollar corrects higher in the absence of key macroeconomic data today, but with the increasing bets on Fed cuts in the coming months, keeping US Dollar bulls in check for now.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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