The US Dollar Index (DXY) is down big time, trading 0.15% lower to trade just under 98.85. This decline occurs while Federal Reserve officials have publicly stated that more interest rate cuts may be necessary. The US Dollar is the United States’ official currency. It is under constant, insistent pressure that will only drive its success in global markets further into the future.
The US Dollar is the de facto currency in several countries. It travels with local currencies across the country and around the world. More than 88% of all global foreign exchange turnover is generated in this market. It currently facilitates an average of $6.6 trillion per day in transactions. After World War II, the US Dollar replaced it as the world’s reserve currency. This change enshrined its most important, yet often overlooked, role as an international finance powerhouse.
Impact of Federal Reserve Policy
The Federal Reserve has two primary objectives: achieving maximum employment and maintaining price stability. In particular, the Fed is focused on making progress toward achieving its stated goals. It will only reduce interest rates if inflation falls below 2% or if labor market slack increases sharply. This last action is the most insidious, as such action usually puts downward pressure on the value of the US Dollar.
Recent comments from Fed officials have sparked fresh discussions over whether interest rates might be cut at all. The market is especially jittery to these sorts of signals because one of the main effects of lower interest rates is putting downward pressure on the currency. These sort of economic challenges are still very much alive. With both producer and import prices having declined by 0.2% in September and an even larger -0.6% in August, the Fed might have to act here.
“Data before the US government shutdown suggested growth may be better than expected, but right now there is no risk-free path for monetary policy.” – Fed Chair Jerome Powell
While understandable given the current economic circumstances, this sentiment poses significant risks to where we go from here on the path of monetary policy. Never has the Fed faced more difficult challenges. Its decisions will undoubtedly shape the US Dollar and its place in the world for decades to come.
Current Market Dynamics
Over the past few trading days, USD/CHF has lost nearly 800 ticks. This marked decline was especially felt during Asian trading hours late on Wednesday. This drop-off is a reflection of the continued uncertainty in the currency markets. It helps illustrate just how much economic indicators influence exchange rates.
Like many other economic indicators, the recent increase in producer and import prices adds a wrinkle to the overall story about inflation and short-term economic growth. With inflationary pressures fading, analysts will be looking to see what this means for the Fed’s decision-making process going forward. If inflation keeps following its current path downward, that could lead to additional easing of interest rates.
Yet the US Dollar continues to remain the world’s premier reserve currency. After its rallying performance this year, we are forced to doubt its strength given the changing economic climate. Investors would do well to keep their guard up as they address this volatile space.
Political Factors at Play
US President Donald Trump is only further complicating the economic picture. We’ve never heard him say that he plans to permanently shut down Democrats’ programs. Although this political manoeuvring is distinct from the implementation of monetary policy, it can still significantly shape market sentiment and investor confidence.
In this case, political developments send a wave through economic indicators. These shifts are enough to change the Fed’s mind on raising interest rates. As things develop, domestic and international investors alike will be looking closely. They want to investigate how these factors work with fiscal policy to deliver wins for the market and taxpayers.