US Dollar Index holds steady after Fed hold, traders await US GDP and PCE data

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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, currently trades near 98.95 during the Asian trading hours on Thursday. The DXY steadies following a hawkish hold from the US Federal Reserve (Fed).

US Dollar Index flat lines around 98.95 in Thursday’s Asian session.
Fed held rates steady at its April meeting; Jerome Powell will remain on board.
The preliminary reading of the US Q1 GDP and PCE Price Index inflation report will be in the spotlight later on Thursday.

The US central bank on Wednesday kept the key interest rate in a range between 3.50% and 3.75%. The Fed's 8–4 decision to leave the rate unchanged was its most divided since 1992, drawing three dissents from officials who no longer think the bank should communicate a bias towards easing.

In his final meeting as Chair before his term ended on May 15, Jerome Powell warned that near-term inflation expectations are rising. Powell further stated that he would stay on the Board of Governance for an indefinite period, even after his chairmanship ends.

Markets are now pricing in nearly a 55% probability of a Fed rate hike by April 2027, sharply up from roughly 20% before the decision, according to Reuters.

Traders will take more cues from the preliminary reading of the US Gross Domestic Product (GDP) for the first quarter (Q1) and the Personal Consumption Expenditures (PCE) Price Index inflation report for March, which will be published later on Thursday. If the reports come in better than expected, this could lift the US Dollar against its rivals in the near term.

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.