NZD/USD loses ground to near 0.5750 on Venezuela raid, geopolitical risks
- NZD/USD softens to near 0.5755 in Monday’s early European session.
- The US's weekend raid in Venezuela and the capture of President Nicolas Maduro have lifted the US Dollar, a safe-haven currency.
- RBNZ’s hawkish stance might cap the downside for the pair.
The NZD/USD pair attracts some sellers to around 0.5755 during the early European session on Monday. The US Dollar (USD) edges higher against the New Zealand Dollar (NZD) on the global flight to safety, bolstered by rising geopolitical tensions. The US ISM Manufacturing Purchasing Managers Index (PMI) data will be in the spotlight later on Monday. The attention will shift to the US December employment report on Friday.
The United States (US) carried out a large-scale military strike against Venezuela on Saturday. US President Donald Trump said that Venezuelan President Nicolas Maduro and his wife have been captured and flown out of the country. Trump added early Monday that Washington might make a second military attack if Venezuela’s interim president, Delcy Rodríguez, did not accommodate their demands, per the Guardian. The escalating tensions in the Venezuela crisis could boost the safe-haven currency like the Greenback and act as a headwind for the pair.
However, the upside for the US Dollar might be limited amid concerns over the Federal Reserve (Fed) independence. Traders await Trump's decision for the next Fed Chair as Jerome Powell's term ends in May. Trump said he will announce his pick this month and has said Powell's successor will be "someone who believes in lower interest rates, by a lot."
On the Kiwi front, the Reserve Bank of New Zealand's (RBNZ) hawkish outlook on the future policy path could lift the NZD. RBNZ Governor Ann Breman said that the policy rate is likely to remain at its current level for an extended period if economic conditions unfold as expected. Economists anticipate the Official Cash Rate (OCR) to remain at 2.25% for a period, potentially until mid-2027, before gradually increasing.
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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