Additionally, on Tuesday the US Dollar Index (DXY) remains a firm bid above the mid-99.00s. This newfound stability arrives while US banks are shut down in honor of Veterans Day. This holiday impacts trading volumes and market sentiment, leaving the USD vulnerable to expectations surrounding Federal Reserve interest rate adjustments. The US Dollar is the dominant and most traded currency globally. As the world’s dominant reserve currency, it is instrumental in global financial markets, accounting for more than 88% of all foreign exchange turnover.
The USD is recognized as a legal tender in Ecuador, El Salvador, and East Timor. It is used as a “de facto” currency in numerous other countries, where it circulates alongside local currencies. The USD is the dominant currency in international trade and finance. It powers an astounding $6.6 trillion in average daily transactions.
Federal Reserve Policy and its Impact
The Fed’s (Federal Reserve, it’s our central bank) primary tool to address our economic challenges is interest rates. Its mandate is to maintain inflation at 2%, and by extension control unemployment. When inflation falls below this target level or when unemployment increases, the Fed can decide to lower interest rates. These kinds of actions generally put downward pressure on the USD on net, reducing its overall value.
Market analysts are already expecting the Fed’s next moves to be dovish, especially given the weak economic data we have seen so far. This dovish posture lays the ground for a shallow upside outlook for the Greenback. Investors are looking for further indications as to when the Fed will act. Until then, any resulting changes in market expectations for interest rates could create directional swings in USD value.
Veterans Day and Market Dynamics
With US banks closed for Veterans Day, trading activity will likely slow down to a crawl as a result. During this holiday closure, traders have reduced access to real-time data and the changing market dynamics. They consequently become more susceptible to abrupt sentiment changes directed by Fed messaging. As such, the USD’s performance on this day is more driven by overall economic sentiment than it is by specific trading moves right away.
The DOI closure would further worsen uncertainty in our financial markets, where the speed of information is essential to making wise choices. Though the DXY has remained relatively calm, very low trading volume may increase the chances of volatility when markets go back to regular trading. Investors will be looking for more clues from the Fed on where its interest rate policy is headed.
The Global Role of the US Dollar
For perspective, the USD took over this role from the British Pound after World War II. This transition further cemented it as the important medium of exchange in the United States. It received fame beyond its borders—all the way to China. Countries around the world use the dollar to conduct transactions, bolster foreign reserves, and enter into trade agreements.
The Greenback’s dominance is perhaps best reflected by its monopoly of foreign exchange markets, where it is invariably stronger than any other currency. It accounts for more than 88% of all global foreign exchange turnover. In turn, that makes it so that increases or decreases in its value can have huge effects on economies from El Salvador to Ethiopia.