US Dollar Index trades near 100.00, inches lower ahead of PCE inflation data

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The US Dollar Index pulled back from a two-month high of 99.98 reached on Wednesday.
The Fed left its benchmark interest rate in a range of 4.25%-4.5% in July.
US Core Personal Consumption Expenditures - Price Index is expected to climb 0.3% MoM in June.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is halting its five-day winning streak and trading around 99.80 during the Asian hours on Thursday. However, the Greenback appreciated after the Federal Reserve (Fed) decided to hold its benchmark federal funds rate in a range of 4.25%-4.5% at its July meeting on Wednesday, as widely expected.

Fed Chair Jerome Powell said in a post-policy conference that the US central bank has "made no decisions" about a potential policy change in September, and it may take a bit to assess the effect of tariffs on consumer prices.

US President Donald Trump announced a new trade deal with South Korea, imposing a 15% US tariff on imports from South Korea. The agreement also includes a $350 billion commitment from South Korea toward US-owned and controlled investments, Reuters reported on Wednesday. Moreover, US Commerce Secretary Howard Lutnick said that the United States (US) has made trade agreements with Cambodia and Thailand.

The US Dollar also drew support from stronger-than-expected US economic data. US Gross Domestic Product (GDP) expanded at an annual rate of 3.0% for the April through June period. This figure followed the 0.5% contraction in the first quarter and came in stronger than the expectation of 2.4%.

Traders await the US Personal Consumption Expenditures (PCE) Price Index, due on Thursday, which is expected to accelerate slightly. On Friday, Nonfarm Payrolls (NFP) is expected to hold in positive territory, which could add further fuel to rate hold fears.

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.