US Dollar Index Slides After Bets on Rate Cut Rises

US dollar is the most important currency in the world because of the role it plays as the reserve currency. Every day, businesses and individuals’ transactions with the dollar total more than $10 trillion. Therefore, the strength or weakness of the US dollar is so important because it determines the cost of goods. For example, when the yuan is so weak against the USD, importers are able to slash their import costs.

In the past few weeks, the dollar strength that was going on for a few years came to a halt. This happened as the Federal Reserve turned more dovish as the trade war continued. In the recent Federal Reserve meeting, the bank’s officials said that they were willing to intervene if the trade war continued to wreck the American economy.

Last week, at a conference hosted by the Chicago Fed, the Fed chair and all the other Fed officials reiterated their previous statement that they were ready to intervene. This intervention was widely viewed as rate cuts. Today, most analysts expect the Federal Reserve to slash interest rates this year. The consensus is that the rate cut could happen at the June meeting, which will take place in the coming week. Others expect the rate cut to happen in the September meeting.

A rate cut will be a victory for Donald Trump who has called for the Fed to slash rates. For months, the president has been in a sustained campaign to force the Fed to cut rates. He believes that the Fed is working against his progressive agenda by being extra hawkish. The cut will also be the first time the Fed has slashed rates since the financial crisis. Analysts fear that it will send signals that the US economy is not as strong.

Previous data has shown that the rate cut will be appropriate. Last week, data from the Labor Department showed that the US economy created just 75k jobs. This was much lower than the 180K that investors were expecting. Today, the US will release the inflation numbers. This data is expected to show that the headline CPI rose by 1.9%, below the Fed’s target of 2.0%. The chart below shows the performance of the US dollar ahead of the CPI data.

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