US Dollar Index drifts higher above 99.50 amid hopes US shutdown may end soon

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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 positive note around 99.65 during the Asian trading hours on Monday. The DXY edges higher amid hopes that the US government shutdown may end soon.

US Dollar Index gains traction to near 99.65 in Monday’s early European session.
US Senate advances a government funding bill to end the shutdown.
Consumer Sentiment hit its lowest level since 2022.

Senate Majority Leader John Thune said that bipartisan talks in the US Senate to end the federal shutdown appear to have taken a positive turn. The US Senate on Sunday moved toward a vote on reopening the federal government, suggesting that an end to the historic shutdown is within reach. The measure would fund certain departments through January 30.

The Senate has adjourned until 11 a.m. on Monday, when it will continue considering legislation to reopen the government after tonight's breakthrough. Meanwhile, House Democratic leadership has informed members that votes are planned later this week. Lawmakers will be given 36 hours' notice before any votes are called as they manage travel delays and cancellations during the shutdown. Any positive signs surrounding the end of the federal shutdown could provide some support to the DXY in the near term.

On the other hand, weaker US economic data and uncertainty over the US economic outlook might weigh on the US Dollar. The University of Michigan (UoM) revealed on Friday that the Consumer Sentiment Index declined to 50.3 in November, the lowest level since June 2022, from a final reading of 53.6 in October. This figure came in below the market consensus of 53.2.

Traders ramped up bets on a US rate cut following weak US private jobs data and a downbeat Consumer Sentiment survey. Trading of Fed funds futures has priced in nearly a 67% chance of a 25 basis points (bps) cut to interest rates at the Federal Reserve's (Fed) December meeting, 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.