- AUD/USD wobbles around 0.6420 as the US Dollar struggles to extend its upside despite the Fed guiding no rush for interest rate cuts.
- Fed Powell warns that risks to higher inflation and unemployment have risen.
- Investors await US-China trade talks in Switzerland on Saturday.
The AUD/USD pair trades flat around 0.6420 during North American trading hours on Thursday. The Aussie pair struggles for direction, while the US Dollar (USD) gives up initial gains.
The US Dollar Index (DXY) rose to near 100.20 earlier in the day, on signals from the Federal Reserve (Fed) that monetary policy adjustments are not appropriate amid uncertainty over the United States (US) economic outlook under the leadership of President Donald Trump. However, the USD Index has flattened around 99.90 at the press time.
The guidance from the Fed that there is no rush for interest rate cuts came after the central bank left them steady in the range of 4.25%-4.50% for the third meeting in a row.
Fed Chair Jerome Powell warned that “risks to inflation and unemployment have skewed to the upside”. Powell said that tariffs so far are “significantly bigger-than-expected” and we will see “higher inflation and lower employment” if large increases in tariffs as announced are “sustained”.
Meanwhile, investors look for trade discussions between the US and China, which are scheduled for Saturday in Switzerland. The meeting of US Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer with their Chinese counterparts aims to de-escalate the trade war, not to negotiate a trade deal. Tariffs and counter-tariffs imposed by both nations on each other are very high, and a trade deal cannot be initiated without lowering them.
Any positive outcome from the US-China trade talks will be favorable for both the US and the Australian Dollar (AUD). Given that Australia is the leading trading partner of Beijing, an improvement in China’s economic outlook will strengthen the Aussie Dollar.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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