United States Dollar Index holds above 101.50 ahead of US PCE inflation

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The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, continues its winning streak for the fourth successive day and is trading around 101.60 during the European hours on Thursday.

US Dollar Index holds near a 13-month high of 101.80 as markets anticipated later Federal Reserve rate hikes.
The CME FedWatch tool shows markets pricing in an 83% chance of rate hikes by late December.
US May headline PCE is expected to rise to 4.1%, while core PCE should edge up to 3.4%.

The dollar index remains close to 13-month high of 101.80, reached on Wednesday, amid rising market expectations of Federal Reserve (Fed) interest rate hikes later this year. Traders are positioning for tighter monetary policy after Federal Reserve Chairman Kevin Warsh signaled a firm focus on taming inflation, noting that the broader economy remains on a stable footing. Reflecting this hawkish shift, the CME FedWatch tool shows that markets are now pricing in nearly 83% probability of rate hikes by the end of December.

Traders focus now shifts to the upcoming US Personal Consumption Expenditures (PCE) data release, where headline inflation is expected to heat up to 4.1% YoY in May from April's 3.8%, and core PCE is projected to edge higher to 3.4% YoY.

US 10-year Treasury yield holds steady near 4.1% on Thursday, maintaining their lowest levels in over six weeks. Yields had tumbled roughly 10 basis points the previous day as breakthrough progress in US-Iran peace talks pulled oil prices back down to pre-conflict levels, significantly easing inflation fears.

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.