As you can see, this week was a big USD week. Consequently, the AUD/USD pair shot up near 0.6410 during European trading hours on Tuesday. A recent deal between the United States and China is already easing some of those tariffs. This change in the medium-term fundamentals has greatly increased the demand for antipodean currencies. The long-term trend remains strong. USD is still king. It represents a majority of daily economic activity and is the lifeblood of prosperous and productive economies both domestically and abroad.
The US Dollar, also referred to as the American Dollar, is the official currency of the United States of America. It serves at times as the ‘de facto’ currency in many other countries, circulating together with these countries’ local currencies. The USD is involved in more than 88% of all global foreign exchange turnover. This dominance cements its place, not only as the world’s largest economy, but as the most traded currency in the world. An average of $6.6 trillion in transactions clears through the USD on a daily basis according to data from 2022.
The Dominance of the US Dollar
This moment—the US Dollar replacing the British Pound as the world’s reserve currency—inspired the last major monetary order overhaul after World War II. This transition truly represented a watershed moment in global finance. It set the USD up as the bedrock of a stable and trusted medium for global trade and investment. Its status has only solidified over the decades, ensuring its position as the preferred currency for countless other nations and businesses.
The USD’s strength is not just a testament to its historic dominance. It’s backed with significant economic indicators. All this = higher inflation. Recent data has shown that the US headline Consumer Price Index (CPI) probably increased in a consistent manner by 2.4% y/y. At the same time, core CPI is expected to rise 2.8% y/y. Both measures are up 0.3% MoM. This increase is a key indicator of persistent inflationary pressures that are big enough to influence Federal monetary policy.
That’s why investors and traders monitor these economic indicators so closely. They not only shed light on the strength of the US economy, but they can cause an immediate reaction in the value of the dollar. A predictable inflation rate would boost confidence in the USD, making the currency more attractive in international markets.
Trade Developments Impacting Currency Markets
US-China trade relations have undoubtedly been one of the key factors influencing market forces in recent months. New York Times US Treasury Secretary Scott Bessent “shook Wall Street.” He claimed that during these 90 days Washington and Beijing will lower tariffs mutually, by 115%. This includes reducing US tariffs to 10% and Chinese tariffs to 30%.
So far, markets have reacted very positively to the new announcement. This has led many to hope that this would lead to greater economic collaboration between the world’s two largest economies. Consequently, demand for currencies tied to economies that benefit from trade, like the Australian Dollar, has exploded. The AUD/USD currency pair surged convincingly above 0.6400 as traders cheered this news.
This trade truce is an encouraging sign that tensions seen in recent years across the US-China relationship may begin to calm. Market analysts expect that continued dialogue and cooperation could lead to further agreements that may stabilize trade flows, benefiting both economies in the long run.
Employment Trends and Economic Indicators
As of August, the most recent US labor market data available, the US economy has gained a net increase of 20,000 new workers. At the same time, the unemployment rate remained unchanged at 4.1%. These numbers indicate that the labor market is continuing to power ahead in the face of headwinds. A strong labor market underpins the most important facet of the recovery—stable consumer spending, a key pillar of economic growth.
Market watchers are watching how each of these labor market trends, inflation metrics and new trade agreements play out. If they are able to accomplish this, the outlook for the USD appears reasonably optimistic. Strong employment numbers and a falling inflation rate are creating a perfect storm. This has increased the odds of at least one more Federal Reserve interest rate hike.
The long-term strength of the US Dollar continues to take a heavy toll on global currency markets, especially in South Asia. So the clock ticks as everyone waits for those first economic reports to come rolling in. Market participants are watchfully attuned to the way shifts in monetary policy may respond to the changing economic fundamentals.