USD/CNH retraces to near 7.20 as investors seeks more details on US-China trade deal
- USD/CNH falls back to near 7.18 as the US Dollar underperforms after US President Trump stated trade terms with China.
- Investors expect trade terms provided by US Trump with China lacks what Beijing got in return.
- Market participants will pay close attention to the US PPI data for May.
The USD/CNH pair gives back all gains made on Wednesday and slides to near 7.18 during Asian trading hours on Thursday. The pair weakens as the US Dollar (USD) underperforms its peers, with investors seeking more details in the trade framework laid by negotiators from the United States (US) and China in the two-day meeting in London earlier this week.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slides t near 98.28, the lowest level seen in seven weeks.
On Wednesday, US President Donald Trump stated through a post on Truth.Social that tariff terms with Chine have finalized and both have agreed to loosen export restrictions.
Full magnets, and any necessary rare earths, will be supplied, up front, by China. Likewise, we will provide to China what was agreed to, including Chinese students using our colleges and universities (which has always been good with me!)," Trump wrote. He further added, "We are getting a total of 55% tariffs, China is getting 10%. Relationship is excellent! Thank you for your attention to this matter!"
However, market experts doubt the deal would be this way as it lacks what Beijing is getting in return. “It's a done deal according to President Trump, but we haven't seen any details, which is why I think the market is not reacting to it yet. As with just about everything, the devil is in the details,” analysts at Wealthspire Advisors said.
Meanwhile, investors await the US Producer Price Index (PPI) data for May, which will be published at 12:30 GMT. Investors expect the producer inflation to have grown at a faster pace.
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.
