United States Dollar Index recovers to near 99.00 ahead of US PCE inflation data
- US Dollar Index rebounds to around 99.00 in Wednesday’s early European session.
- The US Treasury could use its General Account to help fund purchases of government bonds.
- Traders await the US July PCE data on Wednesday ahead of the Jackson Hole symposium.
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 99.00 in the early European trading hours on Wednesday. The DXY recovers some lost ground but remains at risk as traders digest renewed US efforts to ease pressure on longer-dated Treasury yields.
Last week, US Treasury Secretary Scott Bessent said that the US Department of the Treasury will double its bond buyback operations to at least $4 billion per operation, up from the current $2 billion maximum, in an effort to stabilize surging long-term borrowing costs. This action has sparked concerns as national debt surpasses $40 trillion.
CNBC reported on Monday that the department could use part of its cash balance to buy back longer-dated bonds to help steady long-term yields, although traders see a confluence of factors that could keep the USD under pressure through the rest of the year.
US President Donald Trump's administration unveiled an expansion of secondary sanctions it can impose on entities and countries that maintain business ties with Iran around the world, per Reuters. Heightened Middle East sanctions could boost safe-haven flows, supporting the US Dollar against its rivals.
Traders have lowered their bets on an imminent interest rate hike by the Federal Reserve (Fed). Markets are now pricing in nearly a 38.4% probability of a 25 basis points (bps) rise in September, down from 67% earlier this month, according to the CME FedWatch tool.
The release of the US July Personal Consumption Expenditures (PCE) Price Index data will be the highlight later on Wednesday. On Friday, the attention will shift to the speech from Fed Chairman Kevin Warsh in Jackson Hole, Wyoming, which could offer some hints about the outlook for US interest rates. Any hawkish remarks from Fed policymakers could lift the DXY in the near term.
Dollar seen vulnerable without clear jackson hole policy signals
Strategists at Scotiabank caution that the Dollar’s recent stabilization could prove fragile in the absence of firmer guidance from US officials. They argue that “investors will want clear signals from US policymakers on the promised fiscal consolidation plan from Bessent and on the Fed’s reaction function from Warsh at Jackson Hole or the dollar is liable to come under renewed pressure,” underscoring how closely markets are watching upcoming policy communications for direction.
Technical Analysis: US Dollar Index keeps a bearish vibe in the near term
In the daily chart, US Dollar Index Spot extends a bearish bias as price holds beneath the 100-day simple moving average (SMA) and the Bollinger band midline. The index is only slightly above the lower Bollinger band, while the Relative Strength Index (RSI) at 34.60 hovers just above oversold territory, suggesting downside pressure is still dominant but nearing stretched conditions.
On the topside, initial resistance emerges at the Bollinger band middle line around 99.55, followed by the 100-day SMA at 99.70, with a stronger cap at the upper Bollinger band near 100.40. On the downside, immediate support is defined by the lower Bollinger band at 98.65, and a clear break below this area would open the door for a deeper slide in the near term.
(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.