US Dollar Index declines to near 100.00 on mixed jobs data and rate cut uncertainty

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US Dollar Index weakens to around 100.15 in Friday’s Asian session.
US data showed faster job creation but a rise in the Unemployment Rate.
Fed’s Hammack supports keeping rates around the current level.

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 near 100.15 during the Asian trading hours on Friday. The mixed delayed US jobs data failed to provide clarity on interest rates. Traders will take more cues from the preliminary reading of the US S&P Global Purchasing Managers Index (PMI) later on Friday.

The Bureau of Labor Statistics (BLS) revealed on Thursday that the US economy created more jobs than expected in September, but a rise in the Unemployment Rate and downward adjustments to preceding months provide an uncertain picture for the US Federal Reserve (Fed) as it weighs whether to lower interest rates next month to support the labor market.

A prolonged US government shutdown has delayed the release of key economic data, including jobs and inflation reports. Uncertainty in the US economy could weigh on the DXY in the near term. According to the CME FedWatch tool, Fed funds futures are now pricing in nearly a 39% chance of a 25 basis points (bps) rate cut at the Fed's December meeting, down from 63% odds that markets priced a week ago.

On the other hand, cautious remarks from the Fed’s officials might help limit the DXY’s losses. Cleveland Fed President Beth Hammack on Thursday reaffirmed her stance against further rate cuts, citing concern over current price levels. Meanwhile. Philadelphia Fed President Anna Paulson stated on Friday that she is approaching December’s policy meeting “cautiously,” adding that the central bank must carefully balance slowing labour momentum against lingering inflation risks.

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.