US Dollar Index jumps to near 108.00, Trump tariff policies in focus
- The US Dollar Index climbs to around 107.95 in Tuesday’s Asian session, up 0.56% on the day.
- Trump said new tariffs will target semiconductors, pharmaceuticals and steel.
- The Fed is likely to hold interest rates steady at its January meeting on Wednesday.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, drifts higher to near 107.95, snapping the three-day losing streak during the Asian trading hours on Tuesday. The fresh tariff threats from US President Donald Trump provide some support to the USD broadly.
Trump said late Monday that he plans to impose tariffs on imported computer chips, pharmaceuticals and steel in an effort to bring production to the United States, boosting the Greenback. This action came after Trump rattled markets by imposing tariffs on Colombia over the weekend before halting the action when the South American nation had agreed to accept military aircraft carrying deported migrants.
Additionally, Trump proposed 25% tariffs on imports from Canada and Mexico, and he threatened to impose taxes on the EU and China on February 1 as well. Investors will closely watch the developments surrounding tariff policies between the US and trading partners. ”Tariffs will remain front and center for the time being, ...especially as we close in on the February 1st deadline for the first round of tariffs," noted Kieran Williams, head of Asia FX at InTouch Capital Markets.
Data released by the Commerce Department's Census Bureau on Monday showed that US New Home Sales rose 3.6% to a seasonally adjusted annual rate of 698,000 units in December from 674,000 units in November. This reading came in above the market consensus of 670,000 units. Later on Tuesday, the US Durable Goods Orders, Conference Board’s Consumer Confidence, and the Richmond Fed Manufacturing Index will be released.
The US Federal Reserve (Fed) interest rate decision will be in the spotlight on Wednesday, with policymakers likely to keep the benchmark interest rate in the current 4.25%-to-4.50% range. Analysts expected the US central bank to reduce rates again at its March and June meetings, but with any further cuts in doubt as policies on immigration and tariffs could fuel inflation.
Market players will closely monitor the Press Conference for guidance about the Fed's rate outlook. A hawkish stance of the Fed could lift the USD, while a dovish approach could drag the USD lower against its rivals.
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.
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