The United States Dollar is the official currency of the United States. It falters not, remaining rooted as the steadfast pillar of the world’s economy. The U.S. dollar is the currency for transactions in the United States. It serves as the ‘de facto’ currency for a number of countries around the globe, circulating side by side with their local currencies. The U.S. dollar is the most traded currency in the world. In 2022, it represented more than 88 percent of all foreign exchange turnover, with average daily transactions skyrocketing to nearly $6.6 trillion.
Recent economic indicators have been working in favor of the administration, pointing to a robust US services sector. Analysts forecast a rise in the US ISM Services Purchasing Managers’ Index (PMI) for August. The ISM Services PMI is one of the most important economic indicators to gauge the health of the world’s largest economy. Any reading above 50 would be interpreted as positive for the USD, signaling expansion in the all-important services sector. Given this backdrop, analysts are still hopeful for a bullish turn from the dollar.
The Role of the US Dollar in Global Finance
Since the end of World War II, the US Dollar has become dominant as the world’s reserve currency. It has displaced the British Pound from this central role. This change has profoundly increased its role in global trade and finance. Today, most countries maintain enormous reserves of USD to facilitate cross-border transactions and insulate their local economies from international shock. Currently, the USD is central to many global trade agreements and accepted in most markets outside of American borders.
Beyond being a purely national currency, the USD operates in the realm of an international standard. This privileged position undergirds its hegemony within the global financial system. Numerous international countries use the USD to trade, allowing direct economic incentives to facilitate navigation through commodities and finished products. Either way, this broad acceptance creates a special role for the dollar, what some have called the world’s safest currency.
In addition, shifts in the value of the USD can create ripple effects that affect other currencies even more dramatically. Changes in interest rates, inflation and US economic growth really determine where changes in investment flows go. It is their effect on currency valuations around the world that is so pernicious. Given its pivotal role, investors and policymakers watch developments impacting the USD with hawk-like vigilance.
Current Economic Indicators Impacting the US Dollar
With each new economic data release, market participants are looking closely to see if inflation in the U.S. is ticking up, down or sideways. As you may know, inflation is now running well above the Federal Reserve’s 2% target. The headline Personal Consumption Expenditures (PCE) is holding firm at 2.6% y/y. This heat drove core inflation up from 2.8% in June to 2.9% in July. This measure takes out the most volatile components, the prices of food and energy. These numbers are bad news as it relates to persistent inflationary pressures and what that means for monetary policy moving forward.
The Federal Reserve’s conduct on inflation in the coming months is very important to the dollar’s form in future. Market observers are appropriately horrified by signs of intractable inflation and recessionary economic growth. As such, speculation about when the Fed will start making rate cuts has grown. If inflation remains elevated or the labor market drops off sharply, the Fed could be in a position to pivot and lower rates. This would have the effect of reducing the strength of the USD.
The soon-to-be-released ISM Services PMI report will reveal whether the services sector can continue to hold things together. This report is particularly important as it comes under increasing pressure. A particularly positive result might do wonders for investor confidence, which would help to prop up the dollar’s value even more.
Future Outlook for the US Dollar
Analysts expectations are high for the ISM Services PMI. They view a strong reading as likely to strengthen the USD’s newfound resilience. With inflation still a major worry globally, the continued expectation that the services sector will stay above 50 (in expansionary territory) is key. Market participants are acutely aware of potential shifts in monetary policy that could arise from evolving economic conditions.
Currently, the USD’s 200-day Simple Moving Average is at 1.1045. This figure is an important technical price indicator closely watched by traders looking for momentum, buying and selling signals. This average acts as a baseline to gauge trends and determine where to invest in currency trading.