Forex Today: US Dollar holds ground as markets assess possible US trade policies
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Eren Sengezer
webinar date
22 Jan @ 07:11 (GMT+0)

Forex Today: US Dollar holds ground as markets assess possible US trade policies

Here is what you need to know on Wednesday, January 22:

Following a rebound during the European trading hours on Tuesday, the US Dollar (USD) lost its momentum as risk flows dominated the action in the second half of the day. Early Wednesday, the USD Index holds its ground as markets turn cautious. The economic calendar will not feature any high-tier macroeconomic data releases.

US Dollar PRICE This week

The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the weakest against the Euro.

  USD EUR GBP JPY CAD AUD NZD CHF
USD   -1.35% -1.20% -0.28% -0.87% -1.07% -1.12% -0.70%
EUR 1.35%   0.09% 0.99% 0.37% 0.34% 0.12% 0.53%
GBP 1.20% -0.09%   0.84% 0.28% 0.26% 0.03% 0.44%
JPY 0.28% -0.99% -0.84%   -0.59% -0.76% -0.95% -0.61%
CAD 0.87% -0.37% -0.28% 0.59%   -0.14% -0.25% 0.18%
AUD 1.07% -0.34% -0.26% 0.76% 0.14%   -0.31% 0.12%
NZD 1.12% -0.12% -0.03% 0.95% 0.25% 0.31%   0.23%
CHF 0.70% -0.53% -0.44% 0.61% -0.18% -0.12% -0.23%  

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).

US President Donald Trump's tariff threats on Mexico and Canada allowed safe-haven flows to drive the action in financial markets early Tuesday, helping the USD gather strength against its rivals. The bullish opening in Wall Street's main indexes, however, made it difficult for the USD to continue to outperform its rivals in the American session. Meanwhile, Trump said late Tuesday that he is considering imposing a 10% tariff on Chinese imports, arguing that fentanyl they are sending to Canada and Mexico end up in the US. In the European morning on Wednesday, US stock index futures trade mixed, while the USD Index clings to small daily gains above 108.00.

The data from New Zealand showed early Wednesday that the Consumer Price Index (CPI) rose 2.2% on a yearly basis in the fourth quarter, matching the previous quarter's increase but coming in above the market expectation of 2.1%. NZD/USD stays under modest bearish pressure and trades at around 0.5650.

Statistics Canada reported on Tuesday that the annual inflation, as measured by the change in the CPI, edged lower to 1.8% in December from 1.9% in October. On a monthly basis, the CPI declined by 0.4%. Following Tuesday's volatile action, USD/CAD holds steady at around 1.4350 in the European morning on Wednesday.

Following a downward correction in the European session, EUR/USD regained its traction and closed marginally higher on Tuesday. The pair consolidates its weekly gains at around 1.0400 early Wednesday. Later in the session, European Central Bank President Christine Lagarde will be speaking at a panel at the World Economic Forum in Davos.

GBP/USD edges lower in the European trading hours on Wednesday but manages to hold above 1.2300 after posting small gains on Tuesday.

Gold gathered bullish momentum and rose more than 1% on Tuesday. After touching its highest level since early November near $2,760 in the Asian session on Wednesday, XAU/USD retreated slightly and was last seen trading near $2,750.

USD/JPY extends its sideways grind slightly below 156.00 on Wednesday as investors refrain from taking large positions ahead of the Bank of Japan's monetary policy meeting on Friday.

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.