US Dollar Index falls toward 98.00 due to US government shutdown, Fed rate cut bets

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US Dollar Index declines as the government shutdown will extend into next week.
Fed Governor Christopher Waller said he supports another interest rate cut at this month’s policy meeting.
Treasury Secretary Bessent called China’s rare earth export curbs “economic coercion” and “a global supply chain power grab.”

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is extending its losses for the fourth successive session and trading around 98.20 during the Asian hours on Friday. The Greenback weakens as traders adopt caution amid a prolonged United States (US) government shutdown, increased likelihood of US interest rate cuts, and escalating US-China trade tensions.

The US federal government shutdown will continue into next week, delaying key economic data that could guide policy decisions. The US Senate once again failed to pass a Republican bill to extend funding and end the stalemate, marking the tenth unsuccessful attempt on Thursday, the 16th day of the impasse.

US Federal Reserve (Fed) Governor Christopher Waller stated on Thursday that he supports another interest rate cut at this month’s upcoming policy meeting. Meanwhile, the Fed’s newest governor, Stephen Miran, reiterated his call for a more aggressive rate-cut trajectory for 2025 than that favored by his colleagues. The Fed’s Beige Book pointed to growing economic strains, citing rising layoffs and weaker spending among middle- and lower-income households.

US Trade Representative Jamieson Greer and Treasury Secretary Scott Bessent criticized China’s plans to restrict rare earth exports, calling them “economic coercion” and “a global supply chain power grab.” Bessent warned, “If China wants to be an unreliable partner to the world, then the world will have to decouple.” However, both officials left room for negotiation, expressing uncertainty over whether China would actually follow through with the export controls announced last week, per BBC.

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.