The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is holding ground after registering gains in the previous session and hovering around 97.90 during the early European hours on Friday. The US ISM Services PMI and the final S&P Global Services PMI reports are due later in the day.
The Greenback faced challenges after weakness in the US labor market boosted bets on further Federal Reserve (Fed) rate cuts. The CME FedWatch Tool suggests that markets are now pricing in a 97% chance of a Fed rate cut in October and a 91% possibility of another reduction in December.
Additionally, the US Dollar further loses ground amid ongoing concerns over the US government shutdown. The shutdown is expected to extend until next week. Senate Democrats are poised to vote against a GOP-backed short-term funding bill again tomorrow, and the Senate is unlikely to meet this weekend.
The partial US government shutdown is likely to delay the release of key US macro including the US September Nonfarm Payrolls (NFP) report. The US ISM Services PMI and the final S&P Global Services PMI reports are due later on Friday.
US President Donald Trump said Thursday his administration is weighing rebate checks of USD 1,000–2,000 for taxpayers, funded by revenue from new tariffs. Trump claimed tariff collections could eventually reach USD 1 trillion annually, while Treasury Secretary Scott Bessent projected a smaller but still significant figure of over USD 500 billion.
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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