US Dollar Index (DXY) had a significant recovery. It’s now slowly crawling back towards the 99.00 benchmark after hitting a recent monthly low close to 98.70. This latest movement comes as multiple positive economic indicators and US trade developments continue to strengthen the US Dollar. The US Dollar remains unchallenged as the most widely traded currency in the world. With market participants engaged in an ongoing data dialogue about inflation and Federal Reserve action, the dollar is involved in a potentially epoch-making shakeup.
The US Dollar holds a monopoly over the global foreign exchange market, accounting for more than 88% of all transactions. In fact, average daily trading in 2022 reached a staggering $6.6 trillion. After Britain’s defeat in World War II, it replaced the Pound Sterling as the world’s top reserve currency. This transition solidified its supremacy in world finance even deeper. Its importance extends well beyond the borders of the US. In reality, it serves as the ‘de facto’ currency in many of these countries, circulating alongside their domestic currencies.
Inflation Data and Federal Reserve Influence
Inflation data has been at the forefront of whether or not the US Dollar will crash. Inflation has only risen moderately, with current estimates placing inflation at an annual rate of 2.3%. This is a bit less than the 2.4% growth we saw back in March. Such figures might have forced the Federal Reserve’s hand to rethink its interest rate setting policies. No wonder analysts think inflation will go down below 2%. If that occurs, or if unemployment remains unacceptably elevated, the Fed will likely choose to cut interest rates.
And this move would potentially devalue the US Dollar. When rates are low, investors generally are less attracted to dollar-denominated assets. Market observers are particularly attentive to upcoming economic releases, including the Monthly Consumer Price Index (CPI) data for April, scheduled for release on Wednesday. This important data will deepen the understanding of inflation’s trajectory and will likely inform the Fed’s decision-making in the coming months.
Trade Tensions and Fiscal Concerns
Against this backdrop of positive economic indicators, trade tensions between the US and China continue to rattle investor sentiment. Just last week, US President Trump declared a delay on such proposed European Union 50% tariffs until July 9. This delay only provides short-term relief across most sectors, besides federal. It does pose continuing questions about the long-term health of trade relationships and economic stability.
Now, President Trump has called for a new one entirely and brought it to the Senate’s doorstep. If passed as is, it would increase the national debt by $3.8 trillion over the next 10 years. Future pushback against advancement of this legislation had begun to percolate on the basis of fiscal imperfection. All of these imbalances would be detrimental to the US’s long-term credit issuer rating. Analysts say moves like this could introduce volatility into financial markets and impact the strength of the US Dollar itself.
AUD/USD Movement Reflects Market Sentiment
These fluctuations in the US Dollar are reflected in its currency pairs, most notably with US Dollar Australian Dollar (AUD/USD). AUD/USD futures recently reached a new six-month high around 0.6540 on the first day of the week. It soon lost most of those early gains back. The dynamic between these two currencies has been a good indicator of overall market risk sentiment fueled by high volatility macroeconomic data and ongoing geopolitical developments.
Traders are understandably trying to focus on the domestic and global fundamentals driving currencies’ competitive valuations. So they keep a close eye out for any hint of a change in monetary policy or free trade agreements. Currency pairs such as AUD/USD have marked volatility. This is a real world example of how interrelated global financial markets are and how fast conditions can change with a change in the information provided.