AUD/USD declines to near 0.6520 as US Dollar stabilizes ahead of US data
- AUD/USD slides to near 0.6520 as the US Dollar gains ground after a corrective move.
- Soft US JOLTS Job Openings data for July weighed on the US Dollar.
- Australian Trade Balance data for July came in unexpectedly stronger.
The AUD/USD pair falls to near 0.6520 during the European trading session on Thursday. The Aussie pair faces selling pressure as the US Dollar (USD) stabilizes after a sharp corrective move on Wednesday.
At the time of writing, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades calmly near 98.20.
On Wednesday, the Greenback retraced after the release of the weaker-than-projected United States (US) JOLTS Job Openings data for July. The data showed that US employers posted a fresh 7.18 million jobs, missed expectations of 7.4 million, and came in lower than the prior reading of 7.36 million.
Soft job data prompted bets supporting interest rate cuts by the Federal Reserve (Fed) in the September policy meeting.
According to the CME FedWatch tool, the probability for the Fed to cut interest rates in the September policy meeting has increased to 97.6% from 92% seen before the JOLTS Job Openings data release.
In Thursday’s session, investors will focus on the US ADP Employment Change and ISM Services Purchasing Managers’ Index (PMI) data for August, which will be published during North American trading hours.
In Australia, the Trade Balance data for July has come in surprisingly stronger. The Australian Bureau of Statistics reported that the Trade Balance rose to 7,310 million, while it was anticipated to come in lower at 4,920 million from the former release of 5,366 million.
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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