The US Dollar Index (DXY), which tracks the value of the US Dollar (USD) against six other major currencies, slipped after two consecutive days of gains, trading around 104.20 during early European hours on Monday. This decline comes amid dovish sentiment surrounding the Federal Reserve’s policy stance, exerting pressure on the Greenback.
Federal Reserve Policy and Market Expectations
The dovish outlook from the Federal Reserve has been a significant factor in the recent downturn of the US Dollar. The CME Group’s FedWatch Tool indicates a 91.7% probability of a 25-basis point rate cut at the September Fed meeting, up from 90.3% a week earlier. This growing expectation of a rate cut reflects market sentiment that the Fed is leaning towards easing monetary policy.
Federal Reserve Bank of New York President John Williams reinforced this sentiment on Friday, highlighting that the long-term trends causing declines in neutral interest rates before the pandemic are still prevalent. Williams stated, “My own Holston-Laubach-Williams estimates for r-star in the United States, Canada, and the Euro area are about the same level as they were before the pandemic,” according to Bloomberg.
Fed Chair Jerome Powell also added to the dovish tone, mentioning earlier this week that the three US inflation readings this year “add somewhat to confidence” that inflation is on track to meet the Fed’s target sustainably, hinting that interest rate cuts might be forthcoming.
Political Developments in the US
Adding to the USD’s woes, US President Joe Biden announced on Sunday that he would not seek re-election, succumbing to mounting pressure from fellow Democrats. Biden endorsed Vice President Kamala Harris as the party’s candidate to face Republican Donald Trump in the upcoming November election, according to Reuters.
Economic Data and Market Outlook
Traders are now looking ahead to the release of the Global Purchasing Managers Index (PMI) and Gross Domestic Product (GDP) data later this week for fresh insights into the economic conditions of the United States. These data releases are expected to provide further direction for the US Dollar and inform market participants on the broader economic landscape.
In summary, the US Dollar Index is experiencing downward pressure due to dovish expectations from the Federal Reserve, significant political developments, and upcoming economic data releases that will provide additional context for the USD’s trajectory.
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