US Dollar Index rebounds above 99.50 on US trade talks progress
- The US Dollar Index recovers to around 99.75 in Friday’s early European session.
- Hope for US trade talks with allies to support the US Dollar.
- China pushes for tariff cancellation to end the trade war.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, edges higher to near 99.75 during the early European session on Friday amid positive developments in negotiations with allies India, Japan and South Korea. Investors brace for the final reading of the US Michigan Consumer Sentiment, which is due later on Friday.
US Treasury Secretary Scott Bessent has suggested that India is likely to become the first country to finalise a bilateral trade agreement with the US to avoid Trump's reciprocal tariffs on Indian exports. Japan's economy minister, Ryosei Akazawa, will hold a second round of trade talks with Bessent next week.
Meanwhile, South Korea asked for “calm” and “orderly” discussions with the US on trade issues, as it seeks to work out a deal with the US before the pause on reciprocal tariffs is lifted in July. Any signs of trade talks progress could lift the Greenback in the near term.
"If the perception spreads that a reduction in tariffs is near, it could positively influence tariff negotiations with other countries, leading to a retreat from risk-off sentiment and a decrease in U.S. asset selling," which could buoy the dollar back to 145 yen, Mizuho analysts wrote in a note.
On the other hand, traders were concerned about the prospects for the US economy given Trump's inconsistent message on trade agreements and Federal Reserve intervention. Additionally, a lack of actual progress toward opening talks with China could drag the USD lower against its rivals.
Trump said late Thursday that his administration was talking with China on trade. However, Beijing said that no negotiations had been held on the economy and trade, and it urged the US to lift all unilateral tariff measures if it really wished to resolve the issue.
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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