US Dollar Index softens to near 100.00 amid prolonged US government shutdown

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US Dollar Index loses ground to near 100.15 in Wednesday’s Asian session.
US Government shutdown poised to become the longest in US history, weighing on the DXY.
Traders await the US October private payroll and ISM Services PMI data later on Wednesday.

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 negative note around 100.15 during the Asian trading hours on Wednesday. The DXY retreats after reaching a three-month high of 100.25 as the US federal shutdown is set to become the longest in US history.

The US federal government shutdown has entered its 36th day. The duration ties the previous record set in 2019, during President Donald Trump’s first term in the White House. The latest effort to break the logjam, by passing Republican-backed temporary legislation through Congress, failed in the Senate for the 14th time on Tuesday. Concerns over the impact of the shutdown on the US economy could exert some selling pressure on the US Dollar.

The Federal Reserve (Fed) lowered its benchmark overnight borrowing rate at its October meeting last week to a range of 3.75%-4.0%, but Fed Chair Jerome Powell said another cut this year was "not a foregone conclusion.” The likelihood of a December interest rate cut by the US central bank has declined from 93% to 70% after the hawkish remarks from Fed officials. This, in turn, could provide some support to the DXY.

The US October private payroll and ISM Services Purchasing Managers Index (PMI) reports will be the highlights later on Wednesday. ADP Nonfarm Employment Change is projected to show 25K jobs added, compared to a 32K loss in the previous reading. In case of a stronger-than-expected outcome, 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.