- Risk aversion and Fed cuts hope are punishing USD.
- The markets are growing skeptics about Trump’s capacity to close significant trade agreements.
- The recent divergence between the Fed and the ECB is exerting additional pressure on the US dollar.
The USD (DXY) index, which measures the value of the US dollar compared to the most negotiated currencies in the world, is testing levels just below 98.00 for the first time since April 2022, after having depreciated around 1.30% until now today.
Fed tariffs and hopes are harming USD
The skepticism of investors on the durability of a modest commercial agreement between the US and China, and Trump’s threats to implement unilateral tariffs to most commercial partners as of June 9, have undermined the confidence of investors in the capacity of US negotiators to reach significant agreements. The Averse Risk Market is hitting the US dollar against refuge coins such as the JPY and the CHF.
Apart from that, the USD is also collapsing in front of the euro. The soft US inflation figures published on Wednesday have raised the expectations that the Fed will cut the rates at 25 basic points in September.
This contrasts with the hard line position recently adopted by the European Central Bank and highlights a monetary divergence that has driven the EUR/USD to new maximums of several years about 1,1600.
The president of the ECB, Christine Lagarde, suggested after the last week meeting that the bank could be close to the end of the flexibility cycle in a message that has been repeated by several European heads this week. In the absence of relevant publications of the Eurozone, these comments are providing significant support to the euro.
FAQS Central Banks
Central banks have a key mandate that consists in guaranteeing the stability of prices in a country or region. Economies constantly face inflation or deflation when the prices of certain goods and services fluctuate. Una subida constante de los precios de los mismos bienes significa inflación, una bajada constante de los precios de los mismos bienes significa deflación. It is the Central Bank’s task to keep the demand online by adjusting its interest rate. For larger central banks, such as the US Federal Reserve (FED), the European Central Bank (ECB) or the Bank of England (BOE), the mandate is to maintain inflation about 2%.
A central bank has an important tool to raise or lower inflation: modify its reference interest rate. In precommunicated moments, the Central Bank will issue a statement with its reference interest rate and give additional reasons of why it maintains or modifies it (cut it or the SUBE). Local banks will adjust their savings and loan rates accordingly, which in turn will make it difficult or facilitate that citizens obtain profits from their savings or that companies ask for loans and invest in their businesses. When the Central Bank substantially rises interest rates, there is talk of monetary hardening. When it reduces its reference rate, it is called monetary relaxation.
A central bank is usually politically independent. The members of the Central Bank Policy Council go through a series of panels and hearings before being appointed for a position in the Policy Council. Each member of that council usually has a certain conviction on how the Central Bank should control inflation and the consequent monetary policy. Members who want a very flexible monetary policy, with low types and cheap loans, to substantially boost the economy, while comprising with inflation slightly greater than 2%, are called “pigeons.” Members who prefer higher types to reward savings and want to control inflation at all times are called “hawks” and will not rest until inflation is located at 2% or just below.
Normally, there is a president who directs each meeting, has to create a consensus between the hawks or the pigeons and has the last word when the votes must be divided to avoid a draw to 50 on whether the current policy must be adjusted. The president will pronounce speeches, which can often be followed live, in which he will communicate the current monetary position and perspectives. A central bank will try to boost its monetary policy without causing violent oscillations of the fees, the actions or their currency. All members of the Central Bank will channel their position towards the markets before a monetary policy meeting. A few days before a monetary policy meeting is held and until the new policy has been communicated, the members are prohibited from speaking publicly. It is what is called a period of silence.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
