The US Dollar (USD) reclaimed its footing on Wednesday, bouncing back sharply from a three-day losing streak against major currencies. The US Dollar Index (DXY) is a measure of the strength of the Greenback against six other major currencies. Throughout the entirety of the American trading session, it managed to stay suppressed under the 97.50 threshold. This stabilization comes on the heels of significant shifts in international trade. A new trade deal between the United States and Japan worries agricultural and transportation industries, but has investors feeling bullish.
b) The USD is the official currency of the United States. It is the ‘de facto’ currency for scores of countries around the world. In fact, it accounts for more than 88% of all global foreign exchange turnover. Based on 2022 data, this results in a daily average of $6.6 trillion of transactions. Continued strength and stability of the dollar is essential for the US economy. They’re at the heart of keeping our global financial system healthy.
Recent Trade Developments
Surprisingly on the same day the USD tried to claw back some ground. At the same time, US President Donald Trump announced a major new $550 billion trade agreement with Japan. This agreement aims to ease trade tensions between the two nations and includes significant commitments from Japan to invest in American industries.
Trump celebrated the agreement as “maybe the biggest deal ever made,” noting that it would benefit both nations’ economies. This agreement will see Japan invest more than $50 billion in the United States. They hope that 90% of the profits can be reinvested in U.S. industries. This investment would deliver tangible assistance to farmers, manufacturers and other industries repeatedly caught in the crossfire of protracted, and at times mismanaged, trade fights.
The trade agreement goes beyond eliminating tariff peaks and tariff escalation by changing the existing tariff structure. The originally proposed 25% tariffs on a wide variety of Japanese goods were sharply reduced. Today, they are down to a more achievable 15%. This tariff cut is sure to increase reciprocal trade flow between the two countries, helping to grow both economies in the process.
Broader Implications for the Dollar
The new North American trade agreement has injected a dose of hope into the market. The reprieve is overshadowed by a perplexing report indicating that US home resales fell 2.7% in June to an annualized rate of 3.93 million units. Indicators like these can shake confidence in any currency, no matter how strong and stable it might appear otherwise. Investors are keenly eyeing all of these variables. The DXY’s upward or downward deviation will be dictated by the strength of domestic economic data and developments in international trade relations.
For the USD to maintain its status as a global reserve currency, it needs to do well compared to other major currencies. All of this is particularly important with major trade agreement negotiations currently in progress. The US dollar did take over as the world’s reserve currency after World War II from the British Pound. Today, any change in its strength can send shock waves through global markets.
Next to Japan, Indonesia has been another key player in tariff negotiations with the US. In exchange, the country has promised to lower tariffs on US exports toward the country to 19%, down from a threatened 32%. In addition to these trade facilitation commitments, Indonesia has pledged to cut tariffs on more than 99% of US exports and reduce non-tariff barriers. These commendable developments are another piece of a much larger trend of pro-trade negotiations that could be quite influential in determining the dollar’s future trajectory.
Market Reactions and Future Outlook
Market analysts have been keenly observing how these new trade agreements will affect investor sentiment towards the USD. The recent stabilization of the dollar may indicate a temporary pause amid broader volatility. Traders remain cautious as they assess potential long-term impacts.
The USD’s interactions with other global currencies will probably change further as these trade agreements continue in their progress. If Japan’s investment efforts result in benefits for American industries, it could help restore faith in the USD going forward.
Higher investments and lower tariffs hold the potential to benefit both countries immensely. Together, these reforms would turn a dismal ledger sheet into an optimistic economic forecast.