US Dollar Index steadies near 98.50 ahead of CPI data

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The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is holding ground after registering little gains in the previous session and trading around 98.50 during the European hours on Thursday.

US Dollar Index holds steady as markets remain cautious ahead of Thursday’s Consumer Price Index (CPI) report.
CME FedWatch shows a 73.4% chance of a January hold, while 25-basis-point cut odds rose to 26.6%.
Fed’s Waller said US borrowing costs should be up to one percentage point lower.

The Greenback maintains its position as traders adopt caution ahead of the release of the delayed US Consumer Price Index (CPI) report due later in the day, which is expected to offer fresh insight into inflation trends.

November’s US labor data reinforced signs of a cooling job market, with unemployment rising to 4.6%, the highest since 2021. Although November payrolls increased more than expected, they failed to offset October’s sharp slowdown fully.

The CME FedWatch tool shows a 73.4% probability of rates being held at the Fed’s January meeting, down from 75.6% a day earlier. Meanwhile, the likelihood of a 25-basis-point rate cut has risen to 26.6% from 24.4%.

Fed officials are divided on the need for further policy easing next year. The median projection shows one rate cut in 2026, while some policymakers expect none. In contrast, traders are pricing in two rate cuts next year.

Fed Governor Christopher Waller said at a CNBC forum on Wednesday that the United States (US) borrowing costs should be up to one percentage point lower. Waller warned that job growth has slowed to near zero and advocated for measured rate cuts next year to support employment. However, he noted that with inflation still elevated, there is no urgency, adding that policymakers can gradually move rates toward neutral.

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.