- AUD/USD climbs to near 0.6350 as the US Dollar has plunged more than 2%.
- The US Dollar nosedives as Trump’s reciprocal tariffs have stoked US recession fears.
- The import duty by the US on China has increased to 54%.
The AUD/USD pair moves higher and advances toward the two-week high of 0.6350 in Thursday’s European session. The Aussie pair strengthens as the US Dollar (USD) faces an intense sell-off, with traders becoming increasingly confident that the new suite of tariffs by President Donald Trump will lead to a United States (US) recession in the near term.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, is down more than 2% to near 102.00. This is the highest one-day correction seen in years.
On Wednesday, US President Trump unveiled his reciprocal tariff plan in which he announced a 10% baseline levy on all imports to the US, which will become effective from April 5. Additionally, Trump slapped different tariffs for each country, ranging from 10%-49%.
Market participants expect that the implementation of full-scale tariffs will stoke inflation and weigh on economic growth. Such a scenario will lead to stagflation in the economy, making the Federal Reserve’s (Fed) job more complicated.
The impact of Trump’s tariffs will also be significant on the Australian economic outlook, given that the US has increased the import duty on Chinese products by 34%. This has come in addition to the 20% levy already imposed by Trump for pouring drugs into the US economy. Deepening concerns over China’s economic outlook weigh on the Australian Dollar (AUD), given Australia’s significant dependence on exports to China.
Meanwhile, China has urged the US to roll back tariffs and warned of countermeasures to safeguard its own rights and interests.
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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