US Dollar Index strengthens above 99.00 on robust US Retail Sales

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US Dollar Index gains ground near 99.15 in Thursday’s early European session.
US Retail Sales rose more than expected in November.
Traders remain concerned about the Fed's independence under the Trump administration.

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 99.15 during the early European session on Thursday. The weekly US Initial Jobless Claims report will be published later on Thursday. The Federal Reserve policymakers are also set to speak, including Raphael Bostic, Michael Barr, Thomas Barkin, and Jeff Schmid.

Data released by the US Census Bureau on Wednesday showed that Retail Sales in the US rose 0.6% MoM in November, following the 0.1% contraction seen in October. This figure came in above the market expectation of a 0.4% increase.

Meanwhile, the US Producer Price Index (PPI) climbed 3.0% YoY in November versus 2.8% prior, according to the Bureau of Labour Statistics (BLS). This print came in above the estimates of 2.7%. Stripping out food and energy, core Producer Prices were also up 3.0% over the year in November, compared to 2.9% in October, beating the forecast of 2.7%.

The DXY has received some support from rising expectations that the Fed will keep rates on hold for the next several months. According to the CME FedWatch tool, financial markets are pricing in nearly a 5.0% probability that the US central bank will cut interest rates at its next meeting in January.

The upside for the US dollar might be limited amid concerns over the Fed’s independence. Fed Chair Jerome Powell called out the US President Donald Trump administration's decision to subpoena him, saying it amounted to intimidating the US central bank into delivering easier monetary policy.

Trump stated on Wednesday that he has no plans to fire Powell despite the Justice Department's criminal investigation into the Fed Chair, but it was "too early" to say what he would ultimately do.

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.