NZD/USD ticks up to near 0.5960 as Fed dovish bets weigh on US Dollar
- NZD/USD gains marginally to near 0.5960 as the US Dollar faces selling pressure due to Fed dovish bets.
- The Fed is certain to cut interest rates in its policy meeting on Wednesday.
- According to Reuters, the RBNZ will cut interest rates two times more in the remainder of the year.
The NZD/USD pair edges higher to near 0.5960 during the late European trading session on Monday. The Kiwi pair gains marginally as the US Dollar (USD) faces selling pressure amid firm expectations that the Federal Reserve (Fed) will cut interest rates in the monetary policy meeting on Wednesday.
During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.2% lower to near 97.40.
According to the CME Fedwatch tool, traders have fully priced in that the Fed will cut interest rates on Wednesday.
Fed dovish expectations have been prompted by growing United States (US) labor market concerns. Last week, Initial Jobless Claims data for the week ending September 5 showed that individuals claiming jobless benefits came in highest in four years at 263K.
As the Fed is widely anticipated to cut interest rates on Wednesday, investors will pay close attention to cues regarding the monetary policy outlook for the remainder of the year.
Meanwhile, the outlook of the New Zealand Dollar (NZD) remains uncertain as the Reserve Bank of New Zealand (RBNZ) is loosen its monetary policy further. According to a report from Reuters, the RBNZ will reduce its Official Cash Rate (OCR) two times in the remainder of the year. The RBNZ has already reduced its OCR 125 basis points to 3% this year.
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.