- US Dollar loses momentum as the enthusiasm from the US NFP report wanes.
- The market’s focus is on the US-China trade negotiations in London.
- The Safe-haven Yen trims losses favoured by a more cautious market mood.
The Yen is drawing some support from the retreating US Treasury yields and a softer US Dollar on Monday. The market has already digested the upbeat US Nonfarm Payrolls data seen on Friday, and investors are turning cautious about holding large USD longs, with all eyes on the US-China trade talks.
Representatives from the world’s two largest economies will meet in London later today, aiming to ease the trade rift and bring their relationship back to the point it was after the Geneva negotiations that led to a sharp reduction of their reciprocal tariffs.
All eyes are on the US-China trade negotiations
US President Trump boosted market expectations over the weekend, with a tweet showing his confidence that the negotiations will go “very well”. This represents a radical shift in tone from last week’s comments complaining that reaching deals with Chinese President Xi was extremely difficult.
The pair advanced to nearly two-week highs on Friday after May’s US Nonfarm Payrolls revealed that the US economy created more jobs than expected, 139K against the 130K market forecasts. These figures have eased concerns about a recession and tackled speculation about further Fed rate cuts, at least until September.
The calendar is thin today and tomorrow. The highlight of the week will be Wednesday’s US CPI release, which will show further insight into the inflationary effects of the tariff turmoil. These figures could help to determine the Fed’s monetary policy decisions and set the US Dollar’s near-term direction.
(This story was corrected on June 9 at 10:30 GMT to delete a paragraph reporting that the ADP Employment figures were scheduled today)
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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