The US Dollar (USD) is retracing Wednesday’s losses against the Canadian Dollar on Thursday, as investors resume the cautious trade witnessed in March, amid dwindling hopes of a de-escalation in Iran. The pair is trading above 1.3910 at the time of writing, after bouncing at the 1.3865 area on Wednesday, with the year-to-date high, at 1.3966, coming into view.
US President Donald Trump’s televised speech disappointed investors, who were hoping for an exit plan from the Iran war. The president failed to offer any specific deadline for the end of the war, reiterated previous claims of a sweeping US victory, and assured that the US Army will hit Iran “extremely hard” during the next two or three weeks. Nothing really new.
Trump also called for allies to “build the courage” to reopen the Strait of Hormuz, which has remained closed by Tehran since the war started on February 28, and has triggered a sharp appreciation in crude prices that is threatening to push the global economy into recession.
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The market reacted with strong risk-aversion. Asian equity markets have dropped sharply, with European and Wall Street futures pointing to hefty losses. Crude prices have recovered the previous two days’ losses, and in FX markets, the safe-haven US Dollar prevails against its main peers.
On the macroeconomic front, US data released on Wednesday beat expectations. The ADP Employment Change showed a 62K increase in payrolls in March, beating expectations of a 40K rise. Retail Sales bounced up 0.6% in February, following a 0.1% decline in January, and the ISM Manufacturing Purchasing Managers’ Index (PMI) showed its strongest performance in nearly 4 years, at 52.7.
In Canada, on the other hand, the S&P Global Manufacturing PMI eased to 50 in March, a level indicating a stalling business activity, from 51 in February. These figures have boosted concerns about the negative economic impact of the Middle East war.
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.
Source: https://www.fxstreet.com/news/usd-cad-bounces-up-on-risk-off-markets-and-returns-above-13900-202604020625
