US Dollar Index attracts some sellers below 97.50, US PCE data in focus
- The US Dollar Index trades in negative territory around 97.25 in Friday’s Asian session.
- The prospect of Trump announcing the next Fed Chair weighs on the US Dollar as traders bet on US rate cuts.
- The US economy shrank faster than expected during the first three months of this year.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, remains on the defensive near 97.25, its lowest level in three and a half years during the Asian session on Wednesday.
US President Donald Trump was considering selecting the next Federal Reserve (Fed) Chair early, fueling fresh bets on US rate cuts. Trump said that he has a list of potential Powell successors down to “three or four people,” without naming the finalists. The concerns over the future independence of the Fed could undermine the US Dollar (USD) against its rivals.
"For now, expectations President Trump will choose a more dovish chair will keep downward pressure on FOMC pricing and the USD,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.
Meanwhile, financial markets have priced in the possibility of a rate cut at the Fed's next meeting in July to 25%, up from just 12% a week ago, and priced in 64 basis points (bps) of reductions by year-end, up from around 46 bps last week, according to Reuters.
The US Gross Domestic Product (GDP) fell at an annual rate of 0.5% in the first quarter (Q1) of 2025, according to the US Bureau of Economic Analysis (BEA) on Thursday. This reading came in worse than the previous estimate and the market expectation of -0.2%. The downbeat GDP data contribute to the Greenback’s downside.
Traders will keep an eye on Friday's release of US Personal Consumption Expenditures (PCE) - Price Index data for May, the Fed's preferred inflation measure. If the report shows a stronger-than-expected outcome, this could help limit the USD’s losses in the near term.
US Dollar FAQs
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.
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.
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.
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.