**US Dollar Index Slips Below 98.00 on Fed Independence Concerns and Rising Rate Cut Expectations**
Adapted and expanded from FXStreet article by Anil Panchal
The US Dollar Index (DXY), which tracks the greenback against a basket of six major currencies, continued its decline in early 2024, falling to near the 98.00 mark. Traders are increasingly worried about the Federal Reserve’s autonomy following critical remarks made by former President Donald Trump. Additionally, rising expectations that the Fed may initiate rate cuts from mid-2024 have exerted further pressure on the dollar.
This marked drop in the DXY underscores growing uncertainty in US monetary policy direction, as well as declining confidence in the US central bank’s ability to operate independently of political influence.
## Key Drivers Behind the USD Decline
The dollar has weakened against most major currencies in early 2024, with several overlapping factors contributing to this trend:
### 1. Concerns Over Federal Reserve Independence
– Former President Donald Trump made comments hinting at reducing the Federal Reserve’s power if re-elected in the 2024 presidential race.
– Trump’s remarks have reignited fears that Fed decisions could become subject to political influence rather than being guided by economic data.
– Market confidence in a central bank’s independence is a crucial pillar of currency stability; any threat to that can trigger FX market volatility.
– According to Bloomberg, Trump’s team has held discussions about weakening the central bank’s ability to set interest rates independently.
– Investors are increasingly concerned about the implications of such moves on long-term inflation stability and economic credibility.
### 2. Rising Rate Cut Expectations
– The latest US economic data points to easing inflation and some signs of a cooling labor market, increasing the probability of Fed rate cuts in 2024.
– Futures markets are now pricing in up to four rate cuts by the end of the year, starting in mid-2024.
– The CME FedWatch Tool is currently indicating a more than 60% probability of a Fed rate cut by June 2024.
– Federal Reserve officials, including Chair Jerome Powell, have indicated that the U.S. economy may no longer warrant the current high interest rates, especially if inflation continues to cool.
– Lower interest rates reduce the yield advantage of holding US assets, making the dollar less attractive to investors and pushing down demand.
### 3. Weak Manufacturing and Employment Data
– Recently released US ISM Manufacturing PMI data showed contraction in December, coming in below expectations. The reading sustained below the 50.0 threshold, indicating economic slowdown in the sector.
– The US labor market growth also appears to be slowing. Although the unemployment rate remains historically low, job growth has moderated.
– Soft job openings data from the JOLTS report added to worries that an economic slowdown could be underway.
– If upcoming reports on Non-Farm Payrolls and inflation continue to show weakness, the case for a dovish Fed policy will strengthen, exerting further downward pressure on the dollar.
### 4. Global Market Sentiment Shifts
– Global risk sentiment has improved in early 2024, as many investors shift from defensive dollar holdings to risk assets, including equities and high-yield bonds.
– Capital outflows from dollar-denominated safe havens to European, Japanese, and emerging market assets are further contributing to the dollar’s weakness.
– A greater appetite for risk is often associated with a weaker dollar, as traders favor currencies linked to commodity exports and economic reopening.
## Technical Outlook for the US Dollar Index (DXY)
At the time of writing, the dollar index trades near 98.30 after having opened the year above the 100.00 mark. The recent price action represents a key technical breakdown, especially considering the following:
– The 98.00 level is a psychologically important support zone. A sustained break below this could open the door to even deeper losses.
– Moving averages are currently pointing downward momentum. The 50
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