US Dollar Index breaks below 98.00 as US jobs data revive dovish Fed bets

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The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, edges lower after two days of gains and trades around 97.90 during the Asian hours on Friday.

US Dollar Index softens as recent labor data signal a cooling job market reinforce dovish Fed expectations.
CME FedWatch shows markets see a 77.3% chance of a Fed hold in March, with the first cut expected in June.
The DXY stays near two-week highs as markets price a slower pace of potential Fed rate cuts.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, edges lower after two days of gains and trades around 97.90 during the Asian hours on Friday. Traders will watch the preliminary February Michigan Consumer Sentiment Index, due for release later in the North American session.

The Greenback softens as recent US labor data point to a cooling job market, reinforcing dovish Fed expectations. Markets now price two rate cuts this year, starting in June, with another potentially in September.

The CME FedWatch tool suggests that markets are pricing in nearly a 77.3% chance that the Federal Reserve (Fed) will hold interest rates steady at its March policy meeting, with anticipation of a first rate reduction in June.

Data from the US Department of Labor showed Initial Jobless Claims rose to 231K in the week ending January 31, above estimates of 212K and the prior 209K. Meanwhile, ADP reported private payrolls rose by just 22K in January, well below expectations of 48K and the previous 37K (revised from 41K).

However, the DXY remains near two-week highs, supported by the slowing pace of potential Federal Reserve (Fed) rate cuts. Fed Governor Lisa Cook said she would not back another cut without clearer evidence that inflation is easing, stressing greater concern over stalled disinflation than labor market weakness.

Traders also weighed the implications of Kevin Warsh’s nomination as Fed chair, citing his preference for a smaller balance sheet and a less aggressive approach to rate reductions. The nomination also eased concerns about the Fed’s independence.

US Dollar FAQs

What is the US Dollar?

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.

How do the decisions of the Federal Reserve impact the US Dollar?

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.

What is Quantitative Easing and how does it influence the US Dollar?

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.

What is Quantitative Tightening and how does it influence the 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.