United States Dollar Index weakens to near 99.50 as traders push back Fed rate hike bets
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, currently trades near 99.50 in the Asian trading hours on Monday. The DXY loses momentum as data showed US Retail Sales unexpectedly declined in July.
Retail Sales in the United States (US) fell 0.6% last month after an unrevised 0.2% gain in June, the US Census Bureau showed on Friday. Market consensus was for a rise of 0.1%. On an annual basis, Retail Sales arrived at 5.0% in July, versus a rise of 6.8% (revised from 6.7%).
The downbeat US Retail Sales, along with softer-than-expected Consumer Price Index (CPI) and Producer Price Index (PPI) inflation data last week, have tempered expectations that the US Federal Reserve (Fed) will raise rates at its September 15-16 policy meeting. Traders are now pricing in just a 31% probability of a September hike, alongside a 69% odds of a rate increase by December, according to the CME FedWatch tool.
“Softer U.S. data over recent weeks has reduced rate hike expectations, with less than one full hike now priced for December,” BNY analysts wrote. “The back end of the Treasury curve remains elevated, with some commentators attributing higher yields to credibility concerns.”
Traders will closely monitor the US conflict with Iran and efforts to open the Strait of Hormuz. Iran’s Foreign Minister Abbas Araghchi said on Friday that there were “no negotiations currently taking place between Tehran and Washington.” Araghchi further stated that the US must agree to Iran’s conditions in order for shipping to resume through the waterway.
Dollar rebound fades as markets re-engage short USD trade
Strategists at Scotiabank observe that the Dollar’s attempt to recover mid-week has quickly lost momentum, noting that “the mid-week rebound following the CPI data stalled yesterday around the PPI release and markets are once again leaning into the short dollar trade broadly amid fading expectations of a September Fed rate hike.” They suggest this renewed bias against the USD reflects investors’ growing conviction that the Fed is unlikely to tighten policy again in the near term.
Technical Analysis: US Dollar Index remains capped under the 100-day SMA
In the daily chart, Dollar Index Spot holds beneath a dense belt of moving-average and volatility resistance, with the 100-day simple moving average (SMA) and the Bollinger Bands’ 20-period midline capping the upside, which keeps the near-term bias tilted to the downside. The lower reading of the 14-day Relative Strength Index (RSI) around 37 reinforces a weak tone, suggesting downside pressure persists while price remains lodged under these ceilings.
On the topside, initial resistance is located at the 100-day SMA around 99.75, ahead of the Bollinger midline at 100.35, while the upper band near 101.80 marks a more distant barrier if a short-covering bounce extends. On the downside, the first notable support aligns with the lower Bollinger Band around 98.85, where volatility support could slow the decline if sellers press the index further.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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.