United States Dollar Index weakens as cooling US inflation eases Fed rate hike odds
- Market attention turns to upcoming US July Retail Sales data following soft inflation reports.
- July PPI unexpectedly stalled, with core PPI rising 0.2%, slightly below market expectations.
- CME FedWatch shows September Fed rate hike probability dropping from 40% to 34.8%.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is losing ground for the second successive day, trading around 99.90 during the Asian hours on Friday. Market attention is now turning toward the upcoming United States (US) July Retail Sales data scheduled for release later in the day. Meanwhile, the Greenback faces downward pressure following a softer-than-expected US inflation report that has weighed on investor sentiment.
Adding to the broader cooling inflation picture, the Bureau of Labor Statistics reported that US wholesale costs for goods and services were flat in July. This came in below the anticipated 0.2% growth and followed a revised 0.1% decline in June. Excluding volatile food and energy components, the core Producer Price Index (PPI) rose 0.2%, slightly under market consensus expectations of 0.3%. On an annual basis, headline PPI climbed 4.7% year-over-year in July, while core PPI increased by 4.2% over the same period.
These cooling inflation metrics have notably shifted expectations regarding Federal Reserve monetary policy. According to the CME FedWatch Tool, markets are now pricing in a 34.8% probability of a US rate hike at the upcoming September meeting, down from 40% immediately following the PPI data release.
Dollar downside opens up as Fed rate hike bets fade but oil risks linger
Rabobank’s Jane Foley observes that “Fed rate hike speculation has recently suffered a setback on the back of recent US data releases,” a shift that, in her view, “opens the prospect of further slippage for the greenback.” However, Foley cautions that this emerging downside for the Dollar is not assured, stressing that the outlook “could still be thrown off course if oil prices spike higher again,” with renewed energy market tensions potentially restoring support for the US currency.
Technical Analysis:
In the daily chart, Dollar Index spot trades at 99.90, maintaining a bearish near-term tone as it sits below the 50-day Exponential Moving Average (EMA) while only just holding above the shorter nine-day EMA. The 14-day Relative Strength Index (RSI) at 41.5 stays in a mildly negative area, suggesting waning bullish momentum, while the FXS Fed Sentiment Index around 134.6 hints that broader Fed-related expectations are not yet translating into sustained dollar strength on the chart.
On the topside, immediate resistance is provided by the 50-day EMA at 100.27, with a stronger barrier at the horizontal level of 101.80, where sellers could reassert control if tested. On the downside, first support is seen at the nine-day EMA at 99.96, followed by a structural floor near 97.62, ahead of additional support zones at 96.49 and 95.56, where deeper setbacks would likely pause if bearish pressure extends.
(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.