- The American dollar index renounces initial profits amid anxiety among investors for commercial negotiations between the US and China in progress.
- A positive result of commercial conversations between the US and China could contribute some certainty in the US economic perspectives.
- The Fed is not expected to cut interest rates before the September monetary policy meeting.
The US dollar index (DXY), which follows the value of the dollar against six main currencies, returns its initial profits and stabilizes around 99.00 during the European negotiation hours on Tuesday. The USD index goes back as investors are anxious in the midst of commercial conversations between the main negotiators in the United States (USA) and China in London.
During European negotiation hours, US Secretary of Commerce, Howard Lutnick, told reporters that commercial conversations with Beijing are going well and that negotiations will probably continue all day, Reuters reported.
The impact of the result of commercial negotiations between the two largest economies in the world will be significant for the US dollar. A positive result of the meeting between the US and China could return the confidence of investors in the attractiveness of a safe refuge of the US dollar (USD), assuming that it will provide some certainty about the US economic perspectives.
The dollar has been hit hard in recent months, since the imposition of new economic policies by US President Donald Trump and erratic announcements about tariff policy led investors to doubt the credibility of the US dollar.
In the domestic sphere, US Consumer Price Index (CPI) for May will be the key trigger for the US dollar, which will be published on Wednesday. According to the CPI, the general inflation and the underlying have grown at a faster rate of 2.5% and 2.9%, respectively. Such scenario would force operators to reduce bets that support the Federal Reserve (FED) to reduce short -term interest rates.
According to the CME Fedwatch tool, it is unlikely that the US Central Bank cut the interest rates before the September monetary policy meeting.
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.
