The EUR/USD pair trades marginally higher to near 1.1800 during the European trading session on Thursday. The major currency pair ticks higher while the US Dollar (USD) holds onto Wednesday’s gains, which were driven by balanced Federal Open Market Committee (FOMC) minutes of the January policy meeting.
As of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, clings to gains near a fresh weekly high of 97.70 posted on Wednesday.
Federal Reserve (Fed) minutes showed the previous day that officials are not in a rush for interest rate cuts, with the United States (US) inflation remaining above the central bank’s 2% target for a longer period. “Several policymakers reportedly said further rate cuts would likely be appropriate if inflation declined in line with their expectations,” FOMC Minutes showed.
Going forward, the major trigger for the US Dollar will be the preliminary Q4 Gross Domestic Product (GDP) data, which will be released on Friday. The US GDP growth is estimated to come in at 3% Year-on-Year (YoY), lower than the previous reading of 4.4%.
On Friday, investors will also focus on the Eurozone/US flash private Purchasing Managers’ Index (PMI) data for February. PMI reports are expected to show that the overall business activity grew at a faster pace in both the US and the Old Continent.
In the Eurozone, investors await the announcement of European Central Bank (ECB) President Christine Lagarde’s successor, who resigned this week.
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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