The US Dollar (USD) remains the most traded currency globally, dominating over 88% of all foreign exchange turnover. Despite its prominence, the USD recently experienced a drop below 106.50 amid growing global tariff concerns and optimism surrounding a potential peace deal in Ukraine. On Tuesday, during European trading hours, the USD continued this trend, reaching approximately 106.30 on the US Dollar Index (DXY).
The USD's status as the world's reserve currency was solidified post-World War II, taking over from the British Pound. The Federal Reserve (Fed), the primary monetary body overseeing the USD, has two key mandates: ensuring price stability and fostering full employment. To meet these objectives, the Fed adjusts interest rates. When inflation surpasses its 2% target, the Fed raises rates, bolstering the USD's value. Conversely, if inflation drops below 2% or unemployment rises significantly, the Fed may lower rates, which can weaken the Greenback.
As the official currency of the United States and a ‘de facto’ currency in several other nations, the USD plays a crucial role in global economic stability. The average daily transactions involving the USD reach an astounding $6.6 trillion.
The Federal Reserve employs various strategies to manage economic conditions, including Quantitative Easing (QE) and Quantitative Tightening (QT). QE involves increasing credit flow in stagnant financial systems, often leading to a weaker USD. On the other hand, QT entails halting bond purchases from financial institutions and not reinvesting in maturing bonds, which can strengthen the USD.
The DXY, which measures the USD against six major currencies, recently recorded losses for two consecutive sessions. This decline reflects reduced demand for safe-haven assets due to positive developments in Ukraine peace negotiations. Typically, a strong USD benefits the US economy when inflation is controlled and unemployment rates remain low.