The US dollar strengthened this week because of higher readings from the Core retail sales report and the Philadelphia Fed Manufacturing Index and lower readings from the US Jobless Claims report. These factors have helped strengthen the dollar index this week to 107.696.
Hawkish utterances from several Fed members this week hinting at the possibility of another round of aggressive interest rate hikes by the committee during their next session in September had all the more revived the strength of the dollar index.
Just recently, the San Francisco Fed President – Mary Daly mentioned in her speech that the committee would continue raising the interest rates until inflation stabilises. Daly believes that a 50 or 75 basis point hike would be appropriate to control the inflation rate and achieve the Fed’s target of cutting inflation to 2%.
Another member of the Fed – Neel Kashkari, the president of the Minneapolis Federal Reserve, opined that he does not believe that the country is currently headed into recession. Thus, tightening the interest rate further does not place the country at an excessive risk of recession, as many have feared.
Still more, St. Louis Fed President James Bullard stated that he was inclined towards another 75-bps rate hike in September than anything else. This will undoubtedly help achieve the committee target for inflation before the end of 2022.
Investors are hopeful that a 50 or 75 basis points hike could be possible during the next Fed session in September.
Analysts believe the dollar index might remain above the current level ahead of the Fed’s session in September. However, many believe a retracement could be possible before then.
What is the dollar index?
The dollar index is often abbreviated as USDX or DXY. Today, it is listed among the tradable indices’ pairs in the forex market. This financial instrument bears so much influence on every other pair traded in the forex market today. This is because the US dollar has been established as a standard for weighing the value of different currencies.
Significant factors that influence the dollar index
- Monetary Policies/Interest rate hike: Monetary Policies refer to the decisions of the Fed Reserve to support economic growth by regulating the interest rate. The interest rate hike is the most important monetary policy that positively influences the US dollar index. The series of aggressive interest rate hikes witnessed in the past four consecutive months was the primary reason why the dollar index rose today to its highest level in 2022. The borrowing rate is reduced whenever the interest rate is hiked, strengthening the US dollar. To this end, investors all paid great attention to the FOMC sessions where the monetary policy decisions are made.
- Consumer Price Index (CPI): The consumer price index measures the change in the prices of goods and services offered to consumers. It is often seen as the most trusted way of measuring the inflation rate within the economy. The CPI data is critical to investors. A higher inflation rate often pushes the Fed to hike the interest rate. Higher readings from the CPI affect the dollar index positively. This is because more investors tend to invest in the US dollar, hoping for an aggressive interest rate hike during the next Fed session.
- NFP Report: The Non-Farm Payroll (NFP) report released every first Friday of the month is critical economic data that measures the unemployment rate within the country. It also gives the data for new jobs created within the past month. An increase in the unemployment rate reduces the strength of the dollar index. In contrast, a reduction in the unemployment rate strengthens the dollar index. Investors always paid attention to this data as it often caused significant volatility in the forex market once released.
- Gross Domestic Product: The US GDP released every quarter is an essential factor that influences the strength of the dollar index. The GDP measures the total value of all the goods and services produced in the US within a financial year. This data comprises an index of total consumption, net export, investment, and government expenditures. A high GDP favours the dollar index, while a low GDP could lead to a massive decline in the dollar index.
- Quantitative Easing (QE): QE is the Central Bank’s monetary policy of boosting the economy and providing liquidity in the capital market by buying government bonds. This lowers the interest rate and promotes economic activities. Often QE involves pushing more money into the economy and often reduces the strength of the dollar index over time.
