US Dollar Index climbs above 99.00 on strong data, Fed shift

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The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is gaining ground for the fifth consecutive day and trading around 99.10 during the Asian hours on Friday.

US Dollar Index rises after robust April Retail Sales grew 0.5% month-over-month, beating expectations.
Stephen Miran's resignation from the Fed Board clears the path for Kevin Warsh to become Federal Reserve Chair.
Trump aims for "better than ever" China ties as President Xi offers to help de-escalate the Iran conflict.

The US Dollar (USD) trends higher against its major peers following the release of robust US Retail Sales data, which grew by 0.5% month-over-month in April. This performance underscores the resilience of American consumer spending even in the face of elevated borrowing costs.

Additionally, the Greenback finds support in shifts within the Federal Reserve (Fed) leadership; the resignation of Stephen Miran from the Board of Governors has paved the way for Kevin Warsh to take over as Fed Chair.

These domestic factors, combined with surging inflation linked to ongoing Middle East tensions, have reinforced market expectations that the Federal Reserve will maintain high interest rates for an extended period or perhaps even implement further hikes.

US President Donald Trump expressed optimism on Thursday, stating his hope for a bilateral relationship with China that is "stronger and better than ever before," while also noting that President Xi offered assistance in de-escalating the Iran conflict. This shift toward diplomacy has provided a boost to risk appetite, which traditionally acts as a headwind for the US Dollar’s safe-haven dominance.

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.