The US Dollar (USD) has taken a beating over the past several trading days. In Tuesday’s Asian trading session, the USD/CHF currency pair was around 0.7910. This activist growth after a correction created by a Monday pullback. It has been informed, more broadly, by a combination of economic fundamentals and market expectations about the path of US monetary policy.
USD stands for United States dollar, which is the official currency of the US. It is extremely powerful politically in Washington and in many other countries. It is widely considered as the ‘de facto’ currency in dozens of other countries, where it circulates openly alongside local scrip. In fact, it makes up more than 88% of all foreign exchange transactions in the world.
Economic Indicators Impacting the Dollar
Recent economic data has been a major driver of market expectations of the Federal Reserve’s impending monetary policy shift. Proof of that came from the ISM Manufacturing Purchasing Managers’ Index (PMI), which confirmed a contraction in factory activity. Further worsening investor confidence, this decline has heightened uncertainty faced by investors. Such economic indicators can significantly influence market conditions, prompting investors to assess the potential for future interest rate adjustments by the Federal Reserve.
On Monday, the US Dollar Index (DXY) broke out to a fresh high at 98.86. This unprecedented demand for the greenback speaks to its status as a safe-haven asset. Inflation rates are falling well below the Federal Reserve’s target of 2% and the unemployment rate is increasing. To that end, fears are increasing that the E.C.B. is looking to cut interest rates. Either development, or both together, would put significant downward pressure on the value of the USD as investors adjust their expectations.
The Federal Reserve’s main tool to reach its dual economic goals is adjusting interest rates. If inflation is low or unemployment is increasing, then the central bank can enact a decrease in interest rates to spur economic activity. Such actions can make the dollar less desirable and enable other countries to reduce their demand for dollars. Lower rates tend to decrease the dollar’s attractiveness to investors seeking out higher yields.
Safe-Haven Demand and Geopolitical Factors
Recent geopolitical developments have significantly increased the demand for the US Dollar. This new influx comes after the indictment of Venezuelan President Nicolas Maduro on drug-trafficking charges. This event has fueled another round of safe-haven buying of USD as investors move to safer assets during uncertain global political landscapes. These events tend to push investors into currencies that are seen as safer, increasing the dollar’s supremacy in global markets even more.
Investors are scrambling to re-position themselves in wake of these dynamics. They’re tuning in to each upcoming economic report that might provide some color around the state of US economic health. Next up on the economic calendar, we’ll get December’s ADP Employment Change and ISM Services PMI on Wednesday. Plus, keep an eye out for the JOLTS Job Openings data for November. These reports would be expected to boost bullish sentiment in the equity markets and help establish expectations for future monetary policy moves by the Fed.
Future Outlook for the US Dollar
Looking forward, analysts predict that the USD’s trajectory will depend largely on forthcoming economic indicators and developments in global markets. The dollar’s performance will likely vary depending on how investors react to data releases related to employment and manufacturing activity. If the next few reports point to sustained economic weakness, this would likely increase the chance of speculation about more monetary easing by the Federal Reserve.
Domestic indicators are not the only players in this game. Geopolitical tensions and the changing international trade landscape will further impact the demand for the US dollar. Its status as the world’s central reserve currency has been critical to its strength. It achieved this position by overtaking the British Pound following World War II and remains the most important variable going forward.