The US Dollar Index (DXY) climbed about 0.40% on Wednesday, rising from a session low near 98.57 to push above 99.00 intraday and peak close to 99.05 during Chair Jerome Powell’s press conference before drifting back to trade about 98.98 in the closing hour. The advance unfolded as a steady stairstep through the European and US sessions, with a fresh leg up on the Federal Open Market Committee (FOMC) decision and a further extension on Powell’s remarks, though a small portion of those gains was pared into the close as price stalled below the 99.05 peak.
The Federal Reserve (Fed) held the federal funds rate at 3.50% to 3.75% for a third consecutive meeting, hardening its inflation language to ‘elevated’ from ‘somewhat elevated’ while citing higher global energy prices and a high level of uncertainty around Middle East developments. The 8-4 Federal Open Market Committee (FOMC) vote drew the most dissents since October 1992: Stephen Miran preferred a 25-basis-point cut, while Beth Hammack, Neel Kashkari, and Lorie Logan voted to hold but opposed the easing bias inserted into the statement. In the press conference, Chair Powell described the decision as “a closer call than in March,” said the energy price surge had not yet peaked, and noted that the number of officials seeing a hike as likely as a cut had moved up. Powell added that a shift away from the easing bias could come as early as the next meeting and that he wanted to see the end of energy and tariff pressures before considering rate cuts, hawkish-tilted remarks that drove the US Dollar to fresh session highs above 99.00 before a modest fade into the close.
DXY 5-minute chart
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.
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