The US Dollar (USD) is on the rise. It continued to strengthen against most major currencies, particularly the Swiss Franc, during the Asian trading session on Tuesday. This is all great news as trade tensions between the U.S. and China thaw. On the bright side, there is increased hope that the US government will reopen after a three-week shutdown. According to a best US dollar tick up USD/CHF pair to approach 0.7930, largely on the strength of a general recovery in US dollar fortunes.
Additionally, the USD is the official currency of the US. It serves as an effective ‘de facto’ currency in a number of other countries where it circulates freely along with local notes. Its importance in the global economy can’t be overstated. It rules foreign exchange markets as well, accounting for over 88% of all global foreign exchange turnover. The amount of these USD transactions on an average day in 2022 reached an astounding $6.6 trillion. This staggering number is a testament to the dollar’s unrivaled importance in global trade and finance.
Impact of Trade Relations on Currency Value
The recent increase in the USD is due in part to the latest escalation in US-China trade relations. This change in the international trade frictions environment has proven downright Goldilocks for the Greenback. This positive turn of events has enabled it to stretch its two-day recovery to three. Economic analysts are convinced this recovery is because of better feelings. They view it as a smart response to the Federal Reserve’s maker policy changes.
The Federal Reserve uses interest rate hikes or cuts as its main lever to try to steer the economy toward desired goals. Analysts note that when inflation falls below 2%, or when the unemployment rate remains high, the Fed may lower interest rates. Such actions almost always bear down on the Greenback’s value. Yet, with overall economic outlook improving and inflation expectations becoming unanchored, the USD seems to find relief from large upswing of investor confidence.
Beyond the immediate impacts on trade relations, political factors are significantly impacting the USD’s performance. Here’s what White House economic adviser Kevin Hassett told CNBC this morning about the government shutdown. He went on to say, with great confidence, that it is “most likely to conclude sometime this week.” This has only added to the support of the US Dollar with investors looking for a fiscal return to normalcy.
The Role of the US Dollar Index
The US Dollar Index (DXY), a measure of the value of the USD against six major currencies. As it stands now, it’s trending in the opposite direction. As of writing, the DXY is 0.12% higher at around 98.70. It’s a useful index as it serves as a measuring stick for the general strength of the dollar, aka the Greenback. No wonder traders and economists alike hang on its every word.
We know economic conditions are always in flux. Market participants keep a keen eye on movements within the DXY, seeking out the DXY for signals of possible changes in domestic monetary policy or economic direction. The USD is proving to be very strong against currencies worldwide. This reflects the fact that investors are entrenching themselves in a bullish position ahead of more positive economic indicators and easing geopolitical risks.
Upcoming Events That May Influence Currency Markets
Looking ahead, market-moving events already on the calendar promise to weigh even more heavily on the USD’s trajectory. President Donald Trump is scheduled to host Chinese leader Xi Jinping later this month. All is not lost as they’ll be meeting at the Asia-Pacific Economic Cooperation (APEC) gathering in South Korea. This meeting will be especially significant as it will be their first meeting since Trump’s reoccupation of the White House.
Many market analysts are hopeful that this meeting could lead to conversations filling the gaps in a worsening trade war. They hope it will produce meaningful policy changes that will benefit both economies. The implications of the expected outcome of this summit are enormous for global currency markets – especially the USD.