US Dollar Index rises above 100.00 near five-month highs ahead of September NFP

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US Dollar Index gains ground ahead of the US September Nonfarm Payrolls release.
FOMC October Meeting Minutes showed that Fed officials remain divided and cautious about the policy outlook.
The CME FedWatch Tool indicates pricing in a 33% odds of the 25-basis-point Fed rate cut in December.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is extending its winning streak for the fifth successive session and trading around 100.30 during the Asian hours on Thursday. Traders await the release of the US September Nonfarm Payrolls (NFP) later on Thursday, to gain fresh impetus on Fed policy outlook.

The US Bureau of Labor Statistics (BLS) said it will not release the regular October employment report because household survey data cannot be collected retroactively. The agency added that the missing data will be incorporated into the delayed November report instead.

The Greenback gained more than 0.5% in the previous session, nearing a five-month high of 100.36 reached on November 5, as markets scaled back expectations for another Federal Reserve (Fed) rate cut in December following the latest Federal Open Market Committee (FOMC) Meeting Minutes.

FOMC Minutes for the October 28-29 meeting indicated that Fed officials are divided and cautious about the path forward for interest rates. Most participants indicated further rate cuts would likely be appropriate over time, but several indicated they did not necessarily view a reduction in December as appropriate.

The CME FedWatch Tool suggests that financial markets are now pricing in a 33% chance that the Fed will cut its benchmark overnight borrowing rate by 25 basis points (bps) at its December meeting, down from 63% probability that markets priced a week ago.

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.