US Dollar Index holds near 100.00 as December Fed rate cut bets rise

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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 100.20 during the Asian hours on Monday. Traders will likely observe the US September Producer Price Index (PPI) report due on Tuesday.

US Dollar Index struggles as Fed rate cut bets increased for December.
The CME FedWatch Tool indicates pricing in a 69% chance of a 25-basis-point Fed rate cut in December.
Fed’s Williams said that policymakers could still cut rates in the “near term.”

The Greenback weakens as renewed expectations of a Fed rate cut in December weigh on sentiment. The CME FedWatch Tool suggests that markets are now pricing in a 69% chance that the Fed will cut its benchmark overnight borrowing rate by 25 basis points (bps) at its December meeting, up from 44% probability that markets priced a week ago.

New York Fed President John Williams said on Friday that policymakers could still cut rates in the “near-term,” a remark that lifted market odds for a December move. Moreover, Fed Governor Stephen Miran said that Nonfarm Payrolls data supports a December rate cut, adding that if his vote were decisive, he “would vote for a 25 bps cut.” However, Boston Fed President Susan Collins said she has not yet made up her mind on a potential move.

The University of Michigan’s (UoM) Consumer Sentiment Index rose in November to 51 from a preliminary 50.3, beating forecasts but posting a decline from October's reading of 53.6. Inflation expectations improved, with the one-year outlook easing to 4.5% from 4.7% and the five-year measure falling to 3.4% from 3.6%.

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.

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