GoUSD, the US Dollar (USD) has been rockin’ and rollin’, showing significant strength over the last few trading sessions. On Tuesday, during the European trading hours, it managed to break above 1.3760 against the Loonie. This increase occurs as the greenback takes advantage of decreasing trade disagreements between the US and the EU. Unsurprisingly, the USD retains its status as the world’s dominant currency. It constitutes more than 88% of all foreign exchange turnover and comprised no less than an astounding average of $6.6 trillion in daily transactions (2022 data).
In the period directly after World War II, the US dollar replaced the British pound as the world’s reserve currency. That made the dollar’s dominance in international finance a fait accompli. The USD is not just used inside of the United States. First, it serves as the ‘de facto’ currency in many other countries and often circulates in parallel with local legal tender. The Federal Reserve has enormous power, largely unchecked, to impact the economy through the raising and lowering of interest rates. This unique power increases its power in fulfilling economic objectives.
US Dollar Index Reflects Positive Momentum
The US Dollar Index (DXY) has rocketed in value. It’s the Federal Reserve’s preferred measure of the USD’s strength against six major developed country currencies. The index surged to just under 99.35, bouncing back from a monthly low of 98.70 posted on Monday. Signs of progress in US-EU trade discussions are driving this rebound. Taken together, these developments have calmed many of the US investors’ biggest fears.
Maros Sefcovic, the EU’s point man in negotiations, laid down the faith that continued development of a collaborative working relationship would occur. He stated, “We continue to stay in constant contact,” highlighting ongoing communication as essential for achieving mutual goals. He further added that both parties are “fully committed to constructive efforts at pace towards an EU-US deal.”
Investors are understandably tracking these developments with great interest, since the results could have a profound effect on currency valuations and trade agreements. The thaw in diplomatic relations has provided the USD with a perhaps desperately appreciated tailwind. As a corollary, it has become quite strong in the foreign exchange market.
Canadian Economic Outlook and Implications
In effect, the USD is getting stronger. At the same time, the eyes of investors are turning north as they wait with bated breath for Q1 GDP figures coming this Friday. Analysts forecast a mild rebound for Canada’s economy. It will increase at an annualized rate of 1.6%, revised down from 2.6% as originally reported. This unanticipated slowdown will surely have important implications for the Bank of Canada’s (BoC) next monetary policy announcement this coming Wednesday.
It’s safe to say the central bank’s decisions will be shaped by many economic indicators — inflation rates, unemployment statistics — just to name two. If inflation were to drop well below 2% or unemployment persist at an unacceptably elevated level, the Federal Reserve would be free to cut interest rates. Such actions would in practice make USD less valuable, directly impacting the USD’s value by weighing it down.
The anticipated GDP data will be critical for investors gauging the health of the Canadian economy and its ability to withstand external pressures, including those stemming from its relationship with the United States.
Impacts of Interest Rate Adjustments
Interest rates have long been considered to be a key factor in determining the direction of currency markets. This is particularly important as the Federal Reserve increasingly relies on interest rate adjustments as its main tool for managing overall economic activity and inflation. By raising interest rates, the Fed can make the dollar more appealing, bringing in foreign capital and driving up the dollar’s value relative to other currencies.
In a situation where inflation is low, or unemployment increases, there will be a blowback to cut interest rates. Such a move could dramatically weaken the USD, causing undulating impacts through currency pairs like USD/CAD. As market participants analyze economic indicators and central bank actions, they remain vigilant for signs of how these factors will influence currency trends moving forward.