USD remains the strongest currency in global financial markets. During the Asian trading session on Wednesday, it is still well bid for the most part, it remains strong close to 0.7970 vs. CHF. Investors are highly interested in the latest economic indicators. They are really looking for signs in the US Consumer Price Index (CPI). The data will be released this Saturday. This information is important. That’s great news, especially considering that the current and continuing US government shutdown has already delayed the release of this report, with many still fearing an overly inflationary rearmament.
The USD is indeed the world’s most actively traded currency. Its use is crucial not only in the United States, but in other countries where it flies with local currency. This extensive adoption further highlights its role as the ‘de facto’ currency of choice for numerous countries. The USD’s hegemony over international trade is unquestionable, comprising more than 88% of the global foreign exchange turnover. That’s a big deal considering it averages over $6.6 trillion in transactions per day.
Economic Indicators and Market Sentiment
The excitement about the upcoming CPI report is evident among economists and investors. Projections indicate that US headline inflation probably climbed back up to an annual rate of 3.1% in September. This is up from 2.9% in August. The same is true for core inflation figures which are projected to increase at a consistent 3.1% clip. These figures will help paint a picture of the economic recovery that will guide important monetary policy decisions by the Federal Reserve.
Federal Reserve Chair Jerome Powell’s tool for combating inflation rests almost entirely on raising interest rates. This is because when inflation goes below 2%, the Fed’s usual response is to lower interest rates. They further reduce if the unemployment rate is judged to be too high. These sorts of actions increase pressure on the USD’s value, rendering upcoming CPI data as increasingly paramount to market participants.
Given these ominous predictions, rumors about a US-China trade deal have run rampant. President Donald Trump was just saying the other day that we’re very close to a mutually fair and beneficial agreement with China. His comments have increased the bullish tone surrounding the USD. Investors widely expect that if trade tensions are resolved, it might lead to increased global economic stability which would support the dollar’s strong performance even more.
The Role of the US Dollar in Global Markets
After World War II, the US Dollar replaced the British Pound as the world’s reserve currency. This major transition enshrined its role as a foundation in international finance and trade. The USD’s stability and reliability are the foundational qualities that have consistently made it the preferred currency for central banks and governments around the world.
The US Dollar Index (DXY), which measures the dollar’s value against six major currencies, was trading firmly near 98.90, indicating robust demand for the dollar amidst global economic uncertainties. Underpinning the current strength of the USD is a number of domestic economic fundamentals. Lastly, its reputation as a global safe haven in times of geopolitical turmoil further enhances its allure.
Additionally, the dollar’s power reaches further than just currency markets. Without it, markets for key commodities, including oil to gold, would come crashing down. Its importance in the larger context of global trade patterns is constantly cemented by this role. The reality is that other countries continue to adopt or stick with USD reserves. Consequently, the dollar’s hegemony is probably going to persist.
Implications of Trade Relations on Currency Strength
The simmering debates over US-China trade relations will be very important in determining the USD’s path forward. The impact of a successful trade agreement would certainly increase economic activity and confidence in the US economy. If pursued, this would more dramatically increase the dollar’s leverage value.
No agreement might sour market mood, weighing on sentiment and weighing on the USD. And investors in currency markets are surely all too aware of how twitchy these sectors can become at news of an unexpected turn in trade negotiations. Therefore, any news that comes through diplomatic channels will be watched with intense scrutiny as it develops.