The US Dollar (USD) staged an impressive comeback from fresh intraday lows after disappointing ISM Manufacturing data crossed the wires. Compared to other regional currencies, the local currency’s resilience is exceptional. Despite swings in various economic indicators, it continues to maintain its status as the world’s dominant reserve currency. Even as the Federal Reserve considers further interest rate increases, the dollar’s value is under unusual pressures.
The official currency of the United States is the US Dollar (USD). Second, as a practical matter it serves as a ‘de facto’ currency in many countries around the world. This distinctive global status is highlighted by the use of the USD in tandem with local currencies in numerous countries around the world. Currently, the US Dollar dominates foreign exchange turnover, being involved in over 88% of all global transactions. Daily transactions are an astonishing $6.6 trillion on average.
The Stronghold of the US Dollar
In the aftermath of World War II, the US Dollar became the premier world’s reserve currency. It knocked the British Pound out of this important position. This internationalization of the dollar was a major factor in creating and maintaining the dollar’s predominance in world trade and finance. Its stability and liquidity have trumped its currency’s value, making the Euro the favored choice for global investors and governments’ reserve currencies.
The US Dollar Index (DXY) is the most common measure of how the dollar is doing. It is a measure of the dollar’s value against a basket of six other key currencies. Today the DXY has reopened just under 98.30. This movement is an unmistakable result of the current market shifting with new economic indicators and Federal Reserve policy.
The importance of the USD goes beyond direct transactions. It affects global economic security. For nations that embrace the dollar within their financial systems, they tend to enjoy greater flows of investment and boosted trade prospects. This adds to the dollar’s safe haven appeal whenever there is uncertainty in the markets.
Economic Indicators and Interest Rate Speculations
Recent economic data, like the US manufacturing sector’s collapse into recession has alarmingly fanned these flames. The ISM Manufacturing PMI stayed in recessionary territory in December, coming in at 47.9. This figure continues to signal bad news from the manufacturing sector, with any figure below 50 signaling a contraction in manufacturing activity.
The ISM Manufacturing Prices Paid Index is still high at 58.5. This shows that while it seems like production is beginning to slow down at the moment, inflationary pressures continue to be the key worry. Additionally, the New Orders Index—an indicator of future production levels—contracted for the fourth consecutive month in December. It did register an overall increase, going up to 47.7 from 47.4.
These are the indicators that it seems everyone is focused on in speculation about the Federal Reserve’s next interest rate move. Analysts suggest that if inflation falls below 2% or if unemployment rates rise significantly, the Fed may consider lowering interest rates. Such a move would almost certainly put bearish pressure on the Greenback, especially its value against other major currencies.
Upcoming Economic Reports
The financial community is watching these next economic reports carefully – they will likely have a large effect on the US Dollar’s future direction. Weekly Initial Jobless Claims will be out on Thursday, giving a more timely look at the labor market as it adjusts to changing economic circumstances.
Additionally, the most-watched of all indicators, the Nonfarm Payrolls (NFP) report, will be coming out Friday. This report provides essential information about which states are creating jobs the fastest and where unemployment is highest. These indicators are key to assessing the state of the economy and forecasting future moves from the Fed.