- The dollar loses ground on Monday due to the decrease in the demand for safe assets.
- New concerns about the commercial agreement between the US and China are undermining the US dollar.
- The greatest hopes of a relief by the Fed are exerting pressure on the USD before this week’s meeting.
The recovery of the American dollar on Friday has been ephemeral. The dollar index, which measures the value of the dollar against a basket of the most negotiated currencies, depreciates 0.3%, approaching the minimum of three years, in 97.55 reached last week.
An improved market feeling, with investors evaluating the impact of the Iran-Israel war after four days of attacks, has undermined the demand for safe assets. The war has not extended to other countries so far, and international pressures for an agreement are increasing hope that a peace agreement will be possible.
As the market approach has moved from geopolitical tensions back to US commercial policy, a news report that suggests that the agreement between the US and China has left unsolved key issues, such as rare earth exports, has revived investors’ concerns about the lack of progress in significant agreements with commercial partners, as the deadline of June 9 is approaching. This has been weighing on the US dollar for months.
Beyond that, the operators are preparing for the monetary policy meeting of the Federal Reserve that will take place later this week. The bank is expected to maintain interest rates without changes, but it could soften its hard line message in the light of the weak economic data of the US recently seen. Moderate maintenance, preparing the ground for a rate cut in September, could send the USD to new minimums.
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 in circulation along with local tickets. According to data from 2022, it is the most negotiated currency in the world, with more than 88% of all global currency change operations, which is equivalent to an average of 6.6 billion dollars in daily transactions. After World War II, the USD took over the pound sterling as a world reserve currency.
The most important individual factor that influences the value of the US dollar is monetary policy, which is determined by the Federal Reserve (FED). The Fed has two mandates: to achieve price stability (control inflation) and promote full employment. Its main tool to achieve these two objectives is to adjust interest rates. When prices rise too quickly and inflation exceeds the 2% objective set by the Fed, it rises the types, which favors the price of the dollar. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which weighs on the dollar.
In extreme situations, the Federal Reserve can also print more dollars and promulgate quantitative flexibility (QE). The QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is an unconventional policy measure that is used when the credit has been exhausted because banks do not lend each other (for fear of the default of the counterparts). It is the last resort when it is unlikely that a simple decrease in interest rates will achieve the necessary result. It was the weapon chosen by the Fed to combat the contraction of the credit that occurred during the great financial crisis of 2008. It is that the Fed prints more dollars and uses them to buy bonds of the US government, mainly of financial institutions. Which usually leads to a weakening of the US dollar.
The quantitative hardening (QT) is the reverse process for which the Federal Reserve stops buying bonds from financial institutions and does not reinvote the capital of the wallet values ​​that overcome in new purchases. It is usually positive for the US dollar.
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.
