The US Dollar Index (DXY), which gauges the performance of the US Dollar against six major currencies, is experiencing a decline for the second consecutive session. Trading around 97.50 during Asian trading hours on Thursday, the Greenback remains under pressure amid prevailing uncertainties surrounding the administration’s economic strategies.
In a recent State of the Union address, President Donald Trump asserted that the US economy is on the path to recovery, providing a defense for the tariffs that his administration has implemented, which he claims support economic growth. He also criticized the Supreme Court for nullifying parts of his tariff policy. Following this decision, Trump increased the new Section 122 tariffs to 10%, a revision made despite earlier threats to elevate the rates to 15%.
Compounding the dollar’s weakening status are remarks made by Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF). Her cautiously dovish comments suggested that inflation in US goods has been partly impacted by tariffs, and she implied that a reduction in the federal funds rate to approximately 3.25%–3.50% could help achieve full employment. However, she also emphasized the necessity for robust fiscal measures to place US public debt on a sustainable path.
Despite these challenges, the dollar’s decline may be somewhat cushioned, as expectations for immediate monetary easing by the Federal Reserve are waning. Chicago Fed President Austan Goolsbee noted the stagnation in progress toward curbing inflation, which remains above the Fed’s 2% target at around 3%. In a similar vein, Boston Fed President Susan Collins remarked that maintaining current interest rates is likely appropriate, citing a strong labor market and enduring inflationary pressures.
The US Dollar, also known as the USD, serves as the official currency of the United States and functions as a de facto currency in various countries that circulate it alongside local currencies. It currently dominates the forex market, accounting for over 88% of global currency turnover, equating to approximately $6.6 trillion in daily transactions.
Historically, the USD supplanted the British Pound as the world’s reserve currency after World War II. It was previously backed by gold until the 1971 Bretton Woods Agreement dismantled the Gold Standard.
Monetary policy is the leading influence on the value of the US Dollar, primarily dictated by the Federal Reserve’s objectives of ensuring price stability and fostering full employment. The Fed utilizes interest rate adjustments as its primary tool for achieving these mandates. During periods of rapid inflation exceeding the 2% target, the Fed may increase rates to bolster the dollar’s value. Conversely, lowering interest rates in times of high unemployment tends to exert downward pressure on the currency.
In extreme scenarios, the Federal Reserve may resort to quantitative easing (QE), a non-standard policy measure aimed at increasing financial liquidity when credit markets become stagnant. QE was prominently used during the Great Financial Crisis in 2008, where the Fed bought US government bonds to inject money into the financial system, often resulting in a weaker dollar.
The opposite process, known as quantitative tightening (QT), occurs when the Federal Reserve ceases its bond purchases and refrains from reinvesting in new treasuries as older bonds mature, typically supporting a stronger dollar.
