AUD/USD gives up early gains as US Dollar rebounds after Trump-Xi meeting
- AUD/USD surrenders early gains as the US Dollar recovers from early losses.
- The US Dollar rebounds on improving trade relations between the US and China.
- Fed’s Powell argues against reducing interest rates in the December meeting.
The AUD/USD pair gives back its early gains and ticks down to near 0.6570 during the European trading session on Thursday. The Aussie pair edges lower as the US Dollar (USD) recovers from early losses after the meeting between United States (US) President Donald Trump and Chinese leader Xi Jinping in South Korea.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades almost flat around 99.20.
After the meeting, US President Trump stated that meeting with Chinese leader Xi was “amazing” and Beijing has agreed to allow the export of rare earths to Washington “openly and freely”. He added that tariffs on imports from China to the US have been reduced to 47% from 57%.
Improving US-China trade relations have boosted the appeal of the US Dollar.
Meanwhile, comments from Federal Reserve (Fed) Chair Jerome Powell that an interest rate cut in the December policy meeting are another major supportive factor for the US Dollar.
Broadly, receding US-China trade frictions are also favorable for the Australian Dollar, given that the Australian economy relies heavily on its exports to Beijing.
On the domestic front, traders doubt that the Reserve Bank of Australia (RBA) will cut interest rates again this year amid accelerating inflationary pressures. The Consumer Price Index (CPI) report showed on Wednesday that price pressures grew at a faster pace of 1.3% in the third quarter of the year, faster than estimates of 1.1% and the prior reading of 0.7%.
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.
Recommended Articles
