The US Dollar trims losses on Friday with investors wary of risk following another sell-off on Wall Street, as concerns of an AI bubble remain alive. The USD Index, which measures the value of the Dollar against a basket of peers, is trading at 99.85 in the early European session, up from weekly lows around 99.65.
The Greenback drew some support from risk aversion as Asian markets followed Wall Street and posted significant losses, with tech stocks leading the drawdown. Fears of a dotcom-like crash, coupled with downbeat employment data from the US, have triggered a rush for safety that is underpinning demand for the US Dollar.
Further signals of the US labour market’s deterioration
In the US, two private employment reports increased concerns about the labour market, offsetting the moderate optimism triggered by Wednesday’s ADP Employment figures.
Data released by Revelio Public Labor Statistics showed that net employment declined by 9,100 in October, with public sector jobs dropping from 22,000. The outplacement firm Challenger, Gray & Christmas, stated that job cuts increased to 153,074 in October, to their highest level in 22 years, as businesses cut costs and adopt AI technologies.
The key Nonfarm Payrolls report will be delayed for the second consecutive month, as the US government shutdown extends for its fifth week. The focus today, thus, is on a slew of Federal Reserve (Fed) speakers and the preliminary Michigan Consumer Sentiment Index, which is expected to have deteriorated slightly in November.
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.