NZD/USD struggles below 0.5900 as Hormuz risks counter Iran diplomacy hopes and support USD
- NZD/USD drifts lower for the second straight day as Hormuz risks support the safe-haven USD.
- Iran diplomacy hopes and fading Fed rate hike bets cap the USD, limiting losses for spot prices.
- Traders look to Fed speaks for some impetus, though the focus remains on US-Iran peace talks.
The NZD/USD pair is seen extending the previous day's retracement slide from the 0.5920-0.5925 area, or the highest level since March 11, and drifting lower for the second straight day on Friday. Spot prices remain depressed below the 0.5900 mark through the early European session, though the intraday downtick lacks bearish conviction.
Despite the latest optimism led by a 10-day truce between Israel and Lebanon, investors remain cautious amid the instability in the Strait of Hormuz due to the US naval blockade of Iranian ports. This assists the safe-haven US Dollar (USD) in preserving the previous day's modest recovery gains from its lowest level since late February and turns out to be a key factor exerting pressure on the NZD/USD pair. The USD bulls, however, seem hesitant amid hopes for a US-Iran peace deal.
In fact, US President Donald Trump struck an optimistic note and told reporters on Thursday that Iran was close to making a deal. Adding to this, the Wall Street Journal reported that Washington and Tehran have agreed in principle to hold fresh talks, though neither side has set a time or venue for the meeting. Nevertheless, diplomatic efforts to end the Middle East conflict, along with receding hawkish US Federal Reserve (Fed) expectations, keep a lid on further USD gains.
Traders are currently pricing in a roughly 30% chance of a Fed rate cut by the year-end. This, in turn, holds back the USD bulls from placing aggressive bets and acts as a tailwind for the NZD/USD pair. Furthermore, investors might opt to wait for more developments surrounding the US-Iran saga, which might continue to infuse volatility across the global financial markets and produce some meaningful opportunities. Nevertheless, the currency pair remains on track to register gains for the second week in a row as traders now look to speeches from influential FOMC members for a fresh impetus.
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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