United States Dollar Index weakens as Fed’s Waller signals rate pause
- US Dollar Index struggles as Fed Governor Waller signals potential rate pause, contrasting with Warsh's hawkish tone.
- Market probability for a September Fed rate hike fell to 50.2% following the remarks.
- Investors await US August payrolls data, expected to add 56,000 jobs, with unemployment at 4.1%.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is losing ground for the third consecutive day and trading around 99.00 during Asian hours on Friday.
The Greenback is facing notable downward pressure following comments from Federal Reserve (Fed) Governor Christopher Waller, who indicated a preference for keeping interest rates unchanged at the upcoming September meeting, provided upcoming inflation data contains no major surprises.
Fed Waller's dovish tone stood in sharp contrast to the hawkish stance delivered by Chairman Kevin Warsh just a week earlier. In response to these remarks, market expectations shifted significantly, with the CME FedWatch tool indicating that the probability of a September rate hike dropped to 50.2%, down sharply from 63.2% the previous day.
Investors and market participants are now shifting their focus toward the release of the US August employment report for further clues on monetary policy trajectory. Current market consensus projects Nonfarm Payrolls to increase by 56,000 jobs, while the Unemployment Rate is forecasted to remain steady at 4.1%.
Adding further headwinds to the Greenback is a surging Japanese Yen, as traders remain on high alert for potential official currency interventions and continue to price in the possibility of more aggressive policy tightening by the Bank of Japan later this year.
Yen extends sharp gains as intervention speculation intensifies
Strategists at Scotiabank highlight that the Japanese currency has staged an outsized move, noting that “the yen is up a shocking 1.5% vs. the USD, building on Wednesday’s impressive gains that sparked renewed speculation around the possibility of official intervention.” They point out that the latest advance comes on top of prior strength, reinforcing market focus on whether authorities may step in to curb further Dollar weakness against the Yen.
Technical Analysis: DXY struggles as bearish bias prevails
In the daily chart, Dollar Index Spot trades at 98.98, extending a bearish near-term tone as it holds beneath both the nine- and 50-period Exponential Moving Averages (EMAs), which now act as overhead barriers. The 14-day Relative Strength Index (RSI) sits below the midline near 40, hinting that downside pressure persists even as the latest pullback slows, while the softening FXS Fed Sentiment Index suggests a waning policy-support backdrop for the dollar.
On the topside, initial resistance emerges at the 9-period EMA around 99.26, with the 50-period EMA near 99.79 reinforcing a broader supply zone above current levels. A daily close back above these clustered EMAs would be needed to ease the immediate downside bias; failing that, the index remains vulnerable to further slippage toward prior lows not yet reclaimed on the daily chart.
(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.
