The US Dollar, the world's most heavily traded currency, has seen a significant decline, losing more than 1% on a weekly basis. As it struggles to gain traction, the USD Index—a measure of the dollar's value against a basket of other major currencies—has been notably weak. This decline comes amidst anticipation of upcoming comments from Federal Reserve officials and the Reserve Bank of Australia's impending monetary policy announcement.
The US Dollar serves as both the official currency of the United States and a 'de facto' currency in many other countries. Its role as the dominant currency is underscored by its involvement in over 88% of all global foreign exchange transactions, with average daily transactions reaching $6.6 trillion as of 2022. Following World War II, the USD replaced the British Pound as the world's reserve currency, solidifying its central role in the global economy.
The Federal Reserve, tasked with maintaining price stability and fostering full employment, uses interest rate adjustments as its primary tool to achieve these mandates. Quantitative easing (QE), another tool in the Fed's arsenal, involves increasing the flow of credit in a stalled financial system, often resulting in a weaker US Dollar. Conversely, quantitative tightening (QT) occurs when the Fed ceases to buy bonds from financial institutions and stops reinvesting in new purchases when bonds mature.
Recently, the US Dollar has shown particular weakness against the British Pound. This decline is part of a broader trend that has seen the USD struggle to maintain its footing. As markets watch closely, the Federal Reserve's actions—particularly concerning interest rates—will likely play a crucial role in determining the dollar's trajectory.
In the early Asian session on Tuesday, all eyes will be on the Reserve Bank of Australia (RBA) as it announces its monetary policy decisions. The RBA's decisions could impact global markets and influence the USD's performance against other currencies.