US Dollar Index steadies near 97.00 amid US, China holiday trading pause

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US Dollar Index hovers as trading stays muted amid US Presidents’ Day and China’s Lunar New Year holidays.
US Dollar may weaken after softer January CPI boosted expectations of Fed rate cuts later this year.
Chicago Fed President Austan Goolsbee said CPI showed mixed signals, with persistently high services inflation a concern.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, has recovered small losses from the previous session and is trading near 97.00 during the Asian hours on Monday. Trading volumes are likely to remain muted, with United States (US) markets closed for the Presidents’ Day holiday, while Mainland China is also shut for the week-long Lunar New Year break.

The US Dollar (USD) could face challenges as softer January Consumer Price Index (CPI) data reinforced expectations that the Federal Reserve (Fed) may cut rates later this year. The CME FedWatch tool suggests that investors now assign nearly a 90% probability to the Fed holding rates steady at its March meeting, up from 81% a week earlier. Markets are pricing in roughly two 25-basis-point cuts by the end of the year, with the first move seen in June at around a 52% probability.

US CPI rose 2.4% year-over-year (YoY) in January, slowing from 2.7% in December and coming in below the 2.5% forecast. On a monthly basis, consumer inflation moderated to 0.2%, down from 0.3% previously and under market expectations of 0.3%.

Moreover, stabilizing the US labor market supports the market's expectations of the Fed keeping rates unchanged in March before delivering two 25-basis-point cuts by year-end. US Nonfarm Payrolls increased by the most in over a year, while the Unemployment Rate unexpectedly declined, pointing to a stabilizing labor market.

Chicago Fed President Austan Goolsbee said in a Yahoo Finance interview Friday that the latest CPI report contained both encouraging elements and areas of concern, particularly persistently high services inflation. Goolsbee added that strong January employment data likely signals stability, noting the labor market remains steady with only modest cooling. He also stated that interest rates still have room to decline further.

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.