USD/CAD falls back ahead of US Initial Jobless Claims data
- USD/CAD retreats to near 1.3775 ahead of the US Initial Jobless Claims data for the week ending September 12.
- Individuals claiming jobless benefits for the first time are expected to come in lower at 240K against the prior release of 263K.
- Both the Fed and the BoC reduced interest rates by 25 bps on Wednesday amid slowing job demand.
The USD/CAD pair gives up its early gains and flattens around 1.3775 during the European trading session on Thursday. The Loonie pair falls back as the US Dollar (USD) struggles to extend its Wednesday’s recovery move amid caution ahead of the United States (US) Initial Jobless Claims data for the week ending September 12, which will be published at 12:30 GMT.
During European trading hours, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.1% down near 96.90. Earlier in the day, the DXY extended Wednesday’s recovery move to near 97.30.
Economists expect the number of individuals claiming jobless benefits for the first time to come in lower at 240K against the prior release of 263K. This was the highest reading seen in four years, which fuelled Federal Reserve (Fed) dovish expectations.
On Wednesday, the USD Index bounced back strongly from its fresh three-year low of 96.20 after the Fed’s monetary policy announcement, in which it reduced interest rates by 25 basis points (bps) to 4.00%-4.25%. The Fed stated that the monetary policy adjustment was appropriate as the job market doesn’t appear to be solid anymore.
Meanwhile, the Bank of Canada (BoC) also reduced interest rates by 25 bps to 2.5%, as expected, on Wednesday, and keeps the door open for further monetary policy easing amid weakness in the job market and a sharp decline in exports, while inflation remains well around the 2% target.
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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