• The US Dollar Index remained strong as Retail Sales climbed by 1.4% in March, indicating robust consumer spending.
  • The Greenback faces continued pressure as investor uncertainty persists amid the unclear direction of US trade and economic policies.
  • Tensions have intensified as President Trump has initiated a new investigation into potential tariffs on critical minerals.

The US Dollar Index (DXY), which tracks the US Dollar (USD) against a basket of six major currencies, is slightly stronger, hovering around 99.50, buoyed by solid consumer spending data. US Retail Sales rose by 1.4% in March, outperforming both the previous month’s 0.2% increase and market expectations of a 1.3% gain, according to data released on Wednesday. Market participants now shift their attention to upcoming US economic indicators, including Building Permits, Housing Starts, the Philly Fed Manufacturing Index, and weekly Initial Jobless Claims.

However, the broader US Dollar outlook remains under pressure amid ongoing investor uncertainty stemming from unpredictable US trade and economic policies. Tensions have intensified following President Donald Trump’s decision to launch a new investigation into potential tariffs on key minerals. The probe, targeting industries such as copper, pharmaceuticals, lumber, and semiconductors, highlights concerns over the US's limited domestic production capacity in strategic sectors, further escalating the trade rift with China.

Federal Reserve Chair Jerome Powell addressed the economic outlook during a speech at the Economic Club of Chicago, noting that the US economy remains “solid” despite heightened uncertainty and downside risks. Powell reiterated that the Fed is well-positioned to wait for greater clarity before adjusting its policy stance, citing near-maximum employment and inflation slightly above the 2% target, though it has moderated significantly.

Meanwhile, a recent survey by the Federal Reserve Bank of New York suggested a surge in consumer pessimism, with more households anticipating higher inflation, weaker job prospects, and tighter credit conditions in the months ahead. Financial markets are now pricing in a potential resumption of rate cuts starting in June, with expectations that the policy rate, currently at 4.25%–4.50 % — could be lowered by a full percentage point by year-end.

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.

Source: Fxstreet