The US Dollar, the most heavily traded currency in the world, is currently experiencing renewed selling pressure. This comes as concerns about tariffs resurface and policy shifts are anticipated. Accounting for over 88% of all global foreign exchange turnover, the US Dollar averages a staggering $6.6 trillion in transactions per day, according to data from 2022. Despite its global dominance, recent developments have cast uncertainty over its near-term prospects.
The official currency of the United States, the US Dollar also serves as the 'de facto' currency in numerous other countries. It circulates alongside local notes, underscoring its pivotal role in international finance. However, its value is not immune to fluctuations, primarily influenced by monetary policy decisions made by the Federal Reserve (Fed).
The Federal Reserve plays a crucial role in shaping the economic landscape through its monetary policy. By adjusting interest rates, the Fed aims to achieve its dual mandates: price stability and full employment. When inflation dips below 2% or unemployment rises excessively, the Fed may lower interest rates, which can weigh on the Greenback. Conversely, if inflation exceeds the 2% target, the Fed is likely to raise rates, thereby supporting the value of the US Dollar.
In addition to interest rate adjustments, the Fed employs quantitative easing (QE) as a tool to stimulate economic activity. This process involves printing more Dollars and using them to purchase US government bonds primarily from financial institutions. While QE can stimulate economic growth, it often leads to a weaker US Dollar due to increased money supply.
On the contrary, quantitative tightening (QT) represents the reverse process. During QT, the Federal Reserve ceases purchasing bonds from financial institutions and refrains from reinvesting principal from maturing bonds into new purchases. This approach can bolster the US Dollar by reducing liquidity in the financial system.
Despite these mechanisms, recent market trends indicate challenges for the US Dollar. The US Dollar Index (DXY), a key measure of the currency’s strength against a basket of major currencies, broke beneath its 20-day Simple Moving Average near 108.50. Efforts by buyers to reclaim this threshold have proven unsuccessful.
Moreover, external economic factors have added to the Dollar's woes. The benchmark 10-year US Treasury bond yield has declined more than 1% below 4.6%, following tariff threats issued by US President Trump. Such geopolitical tensions can lead to uncertainty in currency markets, potentially impacting investor sentiment towards the Greenback.
While the US economy continues to outperform many of its global counterparts, abrupt policy shifts could hinder the Dollar’s near-term recovery efforts. The interplay between domestic monetary policy and international trade dynamics remains a critical factor influencing the currency's trajectory.