- The US Dollar Index gains traction to around 97.55 in Wednesday’s Asian session.
- Trump said he will impose a 50% tariff on copper imports and suggested that more steep sector-specific duties are on the way.
- All eyes will be on the FOMC Minutes, due later 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, edges higher to near 97.55 during the Asian trading hours on Wednesday. The release of the FOMC Minutes will be in the spotlight later on Wednesday.
US President Donald Trump said late Tuesday that he will impose a 50% tariff on imported copper and suggested more steep sector-specific levies are on the way. Trump also said he would soon announce tariffs “at a very, very high rate, like 200%” on pharmaceutical imports.
The lingering threat to inflation from tariffs might convince the US Federal Reserve (Fed) to hold off on cutting interest rates until next year. This, in turn, could provide some support to the Greenback. The markets are now expecting 50 basis points (bps) worth of Fed rate reductions by the end of this year, starting in October.
Traders await the release of the FOMC Minutes due on Wednesday for fresh impetus. This report might offer some hints about how Fed officials view the US economy and give insight into the interest rate path. Several Fed policymakers are also set to speak later this week. Any dovish remarks from Fed officials could drag the US Dollar lower broadly.
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.