The US Dollar (USD) starts the week on a steady note, with the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trading calmly near 101.35.
However, investors brace for high volatility in the counter as an array of United States (US) data is scheduled to be published this week, especially the Nonfarm Payrolls (NFP) data for June, which will be released on Thursday.
Investors will pay close attention to the US NFP data to get fresh cues regarding the Federal Reserve’s (Fed) monetary policy outlook. According to the CME FedWatch tool, there is almost 90% chance that the Fed will deliver at least one interest rate hike this year.
Since the Fed’s first monetary policy announcement in the middle of the current month under new Chairman Kevin Warsh, the importance of data in monetary policy expectations has increased, as comments from Warsh indicated that the central bank will talk less in the current circumstances.
“Absent, also, is so-called forward guidance—which we agreed was not well suited to the current policy conjuncture,” according to the transcript of Chairman Warsh’s Press Conference.
This week, investors will also focus on the US JOLTS Job Openings data for May, and ISM Manufacturing and Services PMI data for June.
On the global front, investors await talks between the US and Iran in Qatar after the exchange of attacks in the last several days near the Strait of Hormuz, a critical chokepoint to one-fifth of global energy flows.
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 found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
