AUD/USD retraces to near 0.6400 as US Dollar strives to gain ground
- AUD/USD ticks lower to near 0.6400 as the US Dollar aims for a cushion after a sharp decline in the last few weeks.
- US President Trump has assaulted the Fed’s independence for not lowering interest rates.
- The trade war between the US and China could impact the Australian Dollar.
The AUD/USD pair corrects slightly to near 0.6400 during European trading hours on Tuesday after posting a fresh four-month high at 0.6440 earlier in the day. The Aussie pair retraces as the US Dollar (USD) strives to gain ground after remaining in the downside trajectory in the last few weeks.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, looks for a cushion after posting a fresh three-year low near 98.00.
However, the outlook of the US Dollar remains bearish as its safe-haven status has come under pressure due to the deepening tussle between United States (US) President Donald Trump and Federal Reserve (Fed) Chair Jerome Powell.
Donald Trump has been criticizing Powell for not lowering interest rates and has blamed that his restrictive monetary policy stance could lead to an economic slowdown.
"With these costs trending so nicely downward, just what I predicted they would do, there can almost be no inflation, but there can be a SLOWING of the economy unless Mr. Too Late, a major loser, lowers interest rates, NOW," Trump wrote in a post on Truth.Social on Monday.
Though investors have underpinned the Australian Dollar (AUD) against the US Dollar, it is underperforming against other peers on Tuesday as investors worry that the escalated trade war between the US and China will impact the Australian economy significantly. Given that the Australian economy relies heavily on its exports to China, fears of a potential slowdown in Beijing also weighed on the Aussie Dollar.
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.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
