USD Index Falls Near 105.00 Amid Defensive Dollar

The US dollar index fell to near 105.00 on Monday amid a defensive US dollar, ahead of key US inflation data releases. Markets are pricing in an 80% chance of a rate cut by the Federal Reserve's September meeting, with around 40 basis points of reductions expected in 2024.

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Aqsa Younas Rana
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USD Index Falls Near 105.00 Amid Defensive Dollar

USD Index Falls Near 105.00 Amid Defensive Dollar

The US dollar index (DXY) fell to near 105.00 on Monday, May 13, 2024, amid a defensive US dollar. The decline comes as traders await key US inflation data this week that could influence the Federal Reserve's decision on interest rates.

Why this matters: The direction of the US dollar has significant implications for global trade and investment, as a stronger or weaker dollar can impact the competitiveness of exports and the attractiveness of foreign investments. A potential rate cut by the Federal Reserve could also have far-reaching consequences for the global economy, influencing borrowing costs and economic growth.

Markets are pricing in an 80% chance of a rate cut by the Fed's September meeting, with around 40 basis points of reductions expected in 2024, according to LSEG data. Recent softer-than-expected US labor market data and a Federal Reserve that ruled out further interest rate rises have contributed to this expectation.

The market's focus this week will be on the release of the US producer price index (PPI) on Tuesday and the consumer price index (CPI) on Wednesday. ING FX strategist Francesco Pesole noted, "CPI is such a big, polarising event for the whole market... It's a possibility going into the event for the market to hold dollars given the recent tendency for inflation data to surprise to the upside."

In currency markets, the euro was up less than 0.1% at $1.0780, while sterling was up 0.1% at $1.2537 before UK labor market data on Tuesday. The yen, which has been subject to suspected intervention by Japanese authorities, was holding at 155.89 per dollar. China's offshore yuan eased 0.1% to 7.2413, while the onshore yuan fell to its lowest since April 30 at 7.2385.

Matt Simpson, senior market analyst at City Index, emphasized, "For the wheels to truly fall off of the dollar, incoming data needs to point to disinflation, not just pockets of weakness here and there." Francesco Pesole of ING added, "There's a chance that if we see another strong US CPI print that Japan will need to deploy another big amount for FX intervention."

The USD index's decline to near 105.00 on Monday reflects the market's cautious sentiment ahead of the crucial US inflation data releases. The CPI report on Wednesday will be a key determinant of the dollar's trajectory and the Fed's potential rate cut timeline. Traders will be closely watching these inflation readings for signs of disinflation that could accelerate the dollar's downside and bring forward the Fed's easing cycle.

Key Takeaways

  • US dollar index (DXY) falls to near 105.00 amid defensive sentiment.
  • Markets price in 80% chance of Fed rate cut by September meeting.
  • US inflation data (PPI, CPI) releases this week to impact dollar's trajectory.
  • Fed's rate cut decision to have far-reaching consequences for global economy.
  • Dollar's decline dependent on signs of disinflation in upcoming data.