US Dollar Index holds losses below 97.00 despite stronger-than-expected NFP report

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The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, trades on a softer note near 96.80 during the Asian trading hours on Thursday. The US weekly Initial Jobless Claims data is due later in the day.

US Dollar Index softens to around 96.80 in Thursday’s Asian session.
Hassett cited higher productivity for the job growth slowdown.
US Nonfarm Payrolls came in stronger than expected; the Unemployment Rate unexpectedly fell.

Slower-than-expected Retail Sales in December on Tuesday and recent comments from White House economic adviser Kevin Hassett on Monday weigh on the DXY. Hassett said that US job gains could be lower in the coming months due to slower labor force growth and higher productivity.

Nonetheless, stronger-than-expected US jobs data on Wednesday provides some relief to concerns about the state of the US labor market, which might help limit the USD’s losses. Data released by the Bureau of Labor Statistics on Wednesday showed that the US economy added 130,000 jobs in January, above the market consensus of 70,000. The Unemployment Rate edged lower to 4.3% in January versus 4.4% prior, better than the forecast of 4.4%.

Federal Reserve (Fed) Bank of Cleveland President Beth Hammack said that the Unemployment Rate is stabilizing, following the upbeat January Nonfarm Payrolls (NFP) report. Meanwhile, Kansas City Fed President Jeff Schmid stated that the central bank needs to keep rates at restrictive levels to continue putting downward pressure on inflation and added he’s not seeing many indications of restraint in the economic data.

Financial markets are now pricing in nearly a 94% probability that the Fed will leave rates unchanged at its next meeting, up from 80% from the previous day, according to the CME FedWatch tool.

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.