US Dollar Index weakens below 99.00, US-China trade talks 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 near 98.90 during the early European session on Wednesday. The DXY weakens after three consecutive days of gains amid the ongoing US federal shutdown.

US Dollar Index softens to around 98.90 in Wednesday’s early European session.
Fears of a prolonged US government shutdown and the prospect of Fed rate cuts undermine the DXY.
Traders will closely monitor the US-China trade talks.

The US government shutdown has entered its 22nd day as the Senate on Monday failed for the 11th time to advance a House-passed measure to fund the government and end the ongoing shutdown. The 50-43 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. Additionally, the release of important economic data from the Bureau of Labor Statistics and the Census Bureau is suspended, complicating decision-making for the Federal Reserve (Fed).

Fed funds futures are currently pricing in nearly a 98.9% chance of a 25 basis points (bps) cut to interest rates at the central bank's meeting on October 29, up from 99.4% odds yesterday, according to the CME FedWatch tool.

On the other hand, positive developments surrounding the US-China relations could help limit the DXY’s losses. US President Donald Trump late Tuesday predicted an upcoming meeting with his Chinese counterpart, Xi Jinping, would yield a “good deal” on trade. However, Trump also conceded that the highly anticipated talks may not happen. US Treasury Secretary Scott Bessent is scheduled to meet with his Chinese counterparts to discuss a de-escalation of trade tensions ahead of the US-China trade talks.

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.