The USD is the official currency. It is the beating heart of global finance and has a profound impact on the lives of people in the United States and the world. As the world’s most traded currency, accounting for over 88% of all foreign exchange turnover, the USD’s movements affect various currency pairs, including the New Zealand Dollar (NZD). In the past few weeks, the NZD/USD pair has rocketed higher with criminal bullish force. It recently hit a new seven-month high above 0.6055, helped along by the ongoing economic uncertainty and U.S. monetary policy shifts.
Consider that the USD is the de facto currency in scores of countries. Yet its importance is huge and impossible to overlook. Its currency rules global supply chains and international trade. It accomplished this as a reserve currency, outpacing the British Pound following World War II. The US dollar that year constituted 88% of global transactions measured by the average daily transaction volume of $6.6 trillion. Its effect is big and only getting bigger by the day.
The Current Landscape of the USD
The Federal Reserve today has enormous influence over the direction of the U.S. economy. It primarily relies on interest rate changes to shape economic and financial conditions. When inflation is too high or unemployment too low, the Fed increases the cost of borrowing by raising interest rates. This, in turn, affects the value—and strength—of the USD. To start, recently released economic data from the U.S. has spooked investors. This prompted alarm and a sharp drop in U.S. Treasury yields. As of writing, the 10-year U.S. bond yield has fallen to just under 4.33%, extending its downward move from earlier sessions.
This reduction in bond yields is almost perfectly correlated to a decrease in the strength of the USD. When yields fall, it is typically a sign of lower confidence in future economic growth, causing a drop in demand for U.S. assets. That might be the start of a slightly weaker dollar. It’s most likely that this could happen if market participants begin to price in possible interest rate reductions by the Federal Reserve at its July policy meeting.
Impact on Currency Pairs: The NZD/USD Surge
In early October, the NZD/USD pair approached a recent peak of 0.6055 on the back of strong market sentiment in the short run. Analysts are particularly focused on the direction of the 20-day Exponential Moving Average (EMA) near 0.5925. This implies a continuation of bullish sentiment toward the currency pair. The factors behind the strength of the NZD against the USD highlight what is at play beyond NZ’s domestic economic fundamentals. It is deeply linked to changes in U.S. monetary policy and leading macroeconomic fundamentals.
Market participants are attuned to the effects of the weak U.S. data on market expectations. Chiefly, they would like to see how these advancements will impact currency valuations. When the Federal Reserve lowers interest rates, it can ignite a stronger thirst for riskier assets. This trend is potentially positive for anticipation currencies such as the NZD. Expectations for future Fed rate cuts have prompted investors to exit trades in multiple markets.
The Broader Economic Implications
The USD’s influence certainly reaches further than weighing in on currency trading. The outcomes for the USD have massive consequences for the world economy. Countries that utilize the USD as part of their monetary system often find themselves vulnerable to fluctuations in its value. USD strength matters. When the USD strengthens or weakens, it can change trade balances, raise or lower inflation rates, and affect developments in foreign investment flows.
Further, the Federal Reserve can be expected to cut interest rates as inflation falls below the 2% target. They should be prepared to intervene if the unemployment rate gets too high. This type of intervention tends to cause the USD to depreciate. Because of this, it can pose additional hazards for economies that rely on it.
Investors and economists alike are watching all these dynamics closely to see how things play out. The relationship between USD performance and U.S. bond yields is perhaps the highest ever. Bond yields are extremely sensitive to all sorts of economic and monetary news. The upcoming fluctuation will set the tone of the market and have profound effects on the value of each pair of these currencies.