The EUR/USD pair showed slight upward movement, hovering near the 1.1800 mark during Thursday’s European trading session. This modest rise comes as the US Dollar (USD) maintains the gains it achieved on Wednesday, bolstered by the balanced minutes from the Federal Open Market Committee (FOMC) meeting held in January.
As of the latest report, the US Dollar Index (DXY), which measures the Greenback’s value against a basket of six major currencies, remained close to a fresh weekly high of 97.70 established on Wednesday. The minutes from the Federal Reserve revealed that officials are not rushing to implement interest rate cuts, given that inflation in the United States continues to outpace the central bank’s benchmark of 2%. The FOMC minutes indicated that several policymakers suggested that additional rate cuts would only be appropriate if inflation decreases in line with their forecasts.
Looking ahead, the upcoming preliminary Gross Domestic Product (GDP) data for Q4 is poised to be a significant catalyst for the US Dollar, with results scheduled for release on Friday. Current estimates point to a year-on-year GDP growth of 3%, a decline from the prior figure of 4.4%.
Investors will also be keenly observing the Eurozone and US flash private Purchasing Managers’ Index (PMI) data set to be revealed on the same day. The PMI reports are projected to reflect accelerated growth in overall business activity for both the US and Europe.
In broader terms, the US Dollar serves as the official currency of the United States and is commonly used in various other countries, where it circulates alongside local currencies. It is recognized as the most heavily traded currency globally, accounting for over 88% of all foreign exchange transactions, translating to an average daily turnover of about $6.6 trillion.
Historically, the USD ascended to the status of the world’s reserve currency post-World War II, supplanting the British Pound. Its strength has typically been underpinned by a gold standard until the system collapsed in 1971 with the Bretton Woods Agreement.
Monetary policy, primarily shaped by the Federal Reserve, is the most significant determinant of the US Dollar’s value. The Fed’s mandates include achieving price stability by controlling inflation and fostering full employment. Adjustments in interest rates serve as the primary tool for achieving these objectives. Typically, rising inflation prompts the Fed to increase rates, thereby enhancing the Dollar’s value, while falling inflation or high unemployment rates may lead to rate cuts that could weaken the currency.
In extraordinary circumstances, the Federal Reserve may resort to printing more Dollars and implementing quantitative easing (QE), a strategy designed to boost the flow of credit during financial stagnation. QE, prominently employed during the 2008 financial crisis, generally results in a weaker US Dollar as it involves the Fed purchasing government bonds predominantly from financial institutions.
Conversely, quantitative tightening (QT) refers to the cessation of bond purchases by the Federal Reserve, which helps maintain a stronger US Dollar by not reinvesting matured bond principal into new purchases. This reversal of QE plays a critical role in shaping market perceptions and the overall strength of the Dollar moving forward.
