AUD/USD trades marginally higher around 0.6500 amid receding US-China trade tensions
- AUD/USD edges up to near 0.6500 as the US Dollar trades subduedly.
- Receding US-China trade tensions turn out as a favorable scenario for the Australian Dollar.
- The Fed is almost certain to cut interest rates in the October policy meeting.
The AUD/USD pair ticks up to near 0.6500 during the Asian trading session on Monday. The Aussie pair edges higher as the Australian Dollar (AUD) gains slightly, following hopes that trade frictions between the United States (US) and China are receding.
Hopes of easing US-China trade tensions bolstered by comments from President Donald Trump, in an interview with Fox Business, that high tariffs were “not sustainable though it could stand”. Trump added that the scheduled meeting with Chinese leader Xi Jinping in South Korea later this month remains on track.
Trade tensions between the US and China prompted after Beijing imposed export controls on rare earth minerals. In response, Washington announced 100% tariffs on imports from China.
Signs of easing US-China trade frictions bode well for the Australian Dollar (AUD), given that the Australian economy relies heavily on its exports to Beijing.
Meanwhile, the US Dollar (USD) trades subduedly at the start of the week, with investors shifting their focus on the delayed US Consumer Price Index (CPI) data for September, which will be published later this week.
The US inflation data will significantly influence market expectations for the Federal Reserve’s (Fed) monetary policy outlook. According to the CME FedWatch tool, traders have fully priced in a 25-basis-points (bps) reduction in interest rates in the policy meeting this month.
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.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
