US Dollar Index rises to near 97.50 due to risk-off sentiment, Fed caution

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US Dollar Index gains ground as Fed Powell emphasized the need to balance persistent inflation with a weakening labor market.
CME FedWatch tool indicates nearly a 92% possibility of a Fed rate cut in October.
The Greenback may strengthen further as safe-haven demand rises amid new tariff threats from US President Donald Trump against Russia.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is gaining ground after two days of losses and trading around 97.30 during the Asian hours on Wednesday. Traders await the upcoming US Q2 Gross Domestic Product Annualized and Personal Consumption Expenditures (PCE) Price Index data, the Federal Reserve’s preferred inflation gauge, due later in the week.

The Greenback gains ground as the US Federal Reserve (Fed) Chair Jerome Powell struck a cautious note, stressing that the US central bank must weigh stubborn inflation against a softening job market, calling it “a challenging situation” and reiterating comments from last week. However, the CME FedWatch tool suggests that money markets are currently pricing in nearly a 92% possibility of a Fed rate cut in October, up from 90% a day earlier.

The flash reading of the S&P Global Purchasing Managers Index (PMI) showed that business activity in the United States (US) slowed in September. Composite PMI ticked down to 53.6 from 54.6 in August, pointing to a private sector that seems to be struggling to strengthen further. Manufacturing PMI eased to 52.0 from 53, signalling waning momentum in the sector. Services PMI slipped to 53.9 from 54.5, suggesting demand there may be easing.

The US Dollar may further appreciate due to increased safe-haven demand, driven by new tariff threats from US President Donald Trump on Russia. At the United Nations (UN) General Assembly on Tuesday, President Trump warned that the United States (US) is ready to impose a “very strong round of powerful tariffs” if Russia refuses to end the war in Ukraine. Trump also criticized European countries for buying Russian energy, arguing that “they are funding the war against themselves,” and urged the EU to join Washington in implementing tariffs to ensure their effectiveness.

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.