USD/TWD remains depressed below mid-29.00s amid easing trade tensions
- USD/TWD trades with a negative bias and remains close to over a one-month low set on Friday.
- The fundamental backdrop favors bearish traders and backs the case for further depreciation.
- Traders, however, seem reluctant and opt to wait for the crucial FOMC decision on Wednesday.
The USD/TWD pair continues with its struggle to attract any meaningful buyers and trades with a mild negative bias below the 29.50 area during the Asian session on Monday. Spot prices remain close to over a one-month low touched last Friday and seem unaffected by a modest US Dollar (USD) uptick.
Despite the fact that the first round of tariff discussions between Taiwan and the US ended without disclosed results, the latest optimism over easing US-China trade tensions is seen as a key factor behind the Taiwan Dollar's (TWD) relative outperformance. Furthermore, the relatively upbeat performance of technology stocks in the US benefits the TWD and acts as a headwind for the USD/TWD pair.
Meanwhile, the USD is looking to build on Friday's modest bounce from a multi-year low amid some repositioning trade ahead of the crucial two-day FOMC monetary policy meeting starting on Tuesday. This holds back traders from placing aggressive bearish bets around the USD/TWD pair. However, bets that the Fed will resume its rate-cutting cycle in September support prospects for further near-term losses.
Hence, any attempted recovery might still be seen as a selling opportunity and remain capped near the 29.70 region. A sustained strength beyond the latter, however, might trigger a short-covering rally and pave the way for some meaningful appreciating move for the USD/TWD pair.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Author
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
