US Dollar Index steadies near 99.00 as traders eye inflation data

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US Dollar Index gains as traders adopt caution ahead of the US Consumer Price Index data.
The Greenback may weaken as markets price in two Fed rate cuts this year, starting in June.
New York Fed President John Williams said policy is well-positioned to curb inflation without harming jobs.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is holding gains after registering modest losses in the previous session. The DXY is hovering around 99.00 during the early hours on Tuesday. Traders await the Consumer Price Index (CPI) data for December due later in the North American session, which could offer clues on the Federal Reserve’s (Fed) policy path.

The Greenback faced challenges amid expectations of a dovish Federal Reserve (Fed). December’s slower-than-expected US jobs growth suggests the US central bank could hold interest rates steady later this month.

Markets are pricing in two Federal Reserve rate cuts this year, starting in June, though an upside inflation surprise could curb easing prospects. The CME Group's FedWatch tool indicates that the Fed funds futures price indicates a 95% probability that the US central bank will keep rates unchanged at its January 27–28 meeting.

Federal Reserve Bank of New York President John Williams said late Monday that US monetary policy is “well-positioned” to steer inflation back to its target without damaging employment. Williams indicated there is no immediate need to resume interest-rate cuts as the central bank edges closer to a neutral policy stance.

The US Dollar also faced challenges amid rising concerns over the Fed’s independence after federal prosecutors threatened to indict Chair Jerome Powell over his congressional testimony on a building renovation, a move Powell has described as an attempt to undermine the central bank’s independence.

Traders are watching rising Middle East tensions after US President Donald Trump said Iran’s leadership sought to “negotiate” following his military threats, while warning that action may come before any meeting.

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.