US Dollar Index holds losses near 100.00 as US government shutdown becomes longest on record

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US Dollar Index edges lower to near 100.05 in Thursday’s Asian session.
The US government shutdown becomes the longest in US history, weighing on the DXY.
Private-sector payrolls rose by 42K in October, according to ADP Research data, after a revised 29K decline in September.

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 100.05 during the Asian trading hours on Thursday. The DXY drifts lower as the US government shutdown is now the longest in US history, raising concerns over economic losses.

The government shuttered on October 1 after Congress failed to break a stalemate over funding negotiations. More than a month later, an end to the stalemate appears nowhere in sight. The uncertainty and a prolonged US federal government shutdown undermine the DXY. The Senate is not currently set to vote on a House-passed measure to reopen the government on Thursday, after it failed to advance for the 14th time on Tuesday.

Private-sector job creation rebounded in October, according to a snapshot of the labor market that has become more closely watched in the absence of official federal jobs data. Private sector employment in the US climbed by 42K in October, compared to the 29K decrease (revised from -32K) recorded in the previous month, the Automatic Data Processing (ADP) showed on Wednesday. This figure came in better than the estimations of 25K.

After the US central bank cut its interest rates last week for a second consecutive meeting, Fed Chair Jerome Powell noted that he sees “very gradual cooling” in the labor market, but nothing more than that.” He made it clear that another reduction at the Fed’s next meeting in December wasn’t certain.

Fed Governor Stephen Miran said on Wednesday that data showing employment at US companies increased in October was "a welcome surprise”. However, Miran suggested that another rate cut could be appropriate in December, adding, "Policy is too restrictive," and that continuing to run a policy that restrictive is to also run unnecessary risks.

Traders will take more cues from Fedspeak on Thursday. Fed officials are set to speak, including Michael Barr, John Williams, Anna Paulson, Beth Hammack, Christopher Waller, and Alberto Musalem. Any hawkish comments from policymakers could lift the US Dollar 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.