US Dollar Index posts modest losses below 99.00, US CPI inflation data in focus

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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 around 98.90 during the early Asian session on Friday. Concerns over a prolonged US federal shutdown continue to weigh on the DXY.

US Dollar Index softens to near 98.90 in Friday’s early Asian session.
The US government shutdown is complicating the Fed’s ability to help the economy.
Traders await the US September CPI report later on Friday.

The US government shutdown, which began on Friday, entered its 24th day, marking the second-longest federal funding lapse in history, with no end in sight. The GOP-backed stopgap bill failed to pass in the Senate for a 12th time on Wednesday evening. The 54-46 vote fell mostly along party lines. A failure by Congress to pass funding legislation can erode investor confidence in US economic governance and weigh on the US Dollar against its rivals.

The Federal Reserve (Fed) is likely to lower its key interest rate by 25 basis points (bps) next week and again in the December policy meeting, according to a Reuters poll. The ongoing US government shutdown delayed the release of key economic data. Fed Chairman Jerome Powell noted that the FOMC would consider alternative data sources when making its decision.

Economists expect the headline US CPI to increase by 0.4% MoM in September, putting the 12-month inflation rate at 3.1%. Excluding food and energy, core CPI is projected to show a 0.3% monthly increase and a rise of 3.1% on an annual basis. In case of a hotter-than-expected inflation outcome, this could lift the US Dollar in the near term.

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.