The value of currencies in foreign exchange markets is primarily influenced by interest rate differentials. Foreign exchange is a direct extension of a country’s monetary policy. Accordingly, the US dollar has performed exceptionally well since 2021, benefiting from the Federal Reserve’s relatively hawkish policy, as well as the exceptional circumstances the United States has experienced in recent years.
The State of the US Dollar: Continued Weakness
Despite its strength in recent years, the US dollar currently appears relatively weak. There are several factors that could influence the movement of the US dollar in the near future. For example, given the political uncertainty surrounding the current US administration’s policy, the market remains awaiting any new signals.
Despite these challenges, the question remains: Will foreign exchange reserve managers, who hold approximately $13 trillion in reserves, consider reducing the value of the US dollar? In this context, the continued rise in gold prices cannot be ignored, as it is an important indicator of investor sentiment toward the US dollar. It will also be interesting to follow the Federal Reserve’s weekly reports on tradable holdings of US Treasury securities, especially those held by foreign central banks.
Factors Affecting the Dollar
Even amid these challenges, the US dollar remains highly influenced by the performance of the US economy and the monetary policies pursued by the Federal Reserve. With the recent auto tariff announcements having little impact, markets remain cautious about the future performance of the US currency.
Market expectations indicate that the US core Personal Consumption Expenditures (PCE) index may remain steady at low levels, ranging between 0.3% and 0.4% on a monthly basis. This suggests that the Federal Reserve’s monetary easing policy may extend over a longer period. In this case, the US dollar is expected to be slightly affected.
US Dollar Movements Amid Tariffs
Short-term interest rates remain unchanged. However, the market is pricing in a rate cut of up to 17 basis points in June, which could happen if inflation continues to rise. These expectations could weigh on the value of the US dollar, but price action could remain subdued given other factors at play.
Last week’s announcement of auto tariffs did not provide any significant support for the dollar. The market demonstrated that several external factors, such as the reciprocal tariffs between the US and other countries, could affect the US dollar. At the same time, the market is anticipating positive economic data for some time, which could help support the dollar in the short term.
Although these tariffs may not have a direct impact on the dollar, the market is seeing daily movements based on upcoming inflation data. If these data show stability or improvement in the US economy, the US dollar could see a slight rise. However, if the data is weak, there could be additional pressure on the US currency.
The Impact of Economic Tensions on the Dollar
The ongoing trade tensions between the United States and some of its major trading partners will likely challenge the US dollar in the coming days. Any escalation in trade wars, such as the imposition of further tariffs, could negatively impact the dollar’s value.
However, general market expectations indicate that the dollar will remain relatively weak amid inflationary pressures and future market expectations. If inflation continues to rise, the Federal Reserve may need to implement more hawkish measures, which would impact the dollar’s price movement.
The Future of the US Dollar in Light of Federal Reserve Policies
The US dollar is one of the most influential assets in the global economy, representing the main driver of financial markets. Since 2021, the dollar has experienced a partial upward movement thanks to the tight monetary policies adopted by the US Federal Reserve. However, the near future of the dollar will largely depend on the decisions the Federal Reserve will make in the coming period.
Federal Policies: Their Impact on the US Dollar
The value of the US dollar is primarily influenced by the monetary policies adopted by the Federal Reserve. In recent years, the Fed has adopted a tight monetary policy, which has helped support the dollar and strengthen it in foreign exchange markets. However, with increasing inflationary pressures, the Fed has begun to reevaluate its monetary policy approach.
If the Fed continues to implement a policy of raising interest rates, this is expected to support the US dollar in the short term. Higher interest rates mean higher borrowing costs, which may lead to reduced domestic spending and increased returns on dollar assets. Higher interest rates also make the dollar more attractive to foreign investors seeking higher returns on their investments. Challenges Facing the US Dollar
Although raising interest rates may strengthen the dollar, there are several challenges that could affect it in the future. Among these challenges are slow growth in the US economy, increasing public debt, and high levels of inflation. These factors could pressure the value of the dollar and limit its ability to maintain its strength in the long term.
Moreover, there are trade tensions that could affect the dollar. For example, the tariff policies adopted by the US administration could reduce trade with other countries, negatively impacting the dollar. Economic fluctuations in major trading partners.
Monetary Policy: Raise or Lower Interest Rates?
The decision to raise or lower interest rates will have a significant impact on the US dollar. If the Federal Reserve decides to cut interest rates in an effort to boost economic growth, this could lead to a decline in the value of the dollar. Lowering interest rates makes the dollar less attractive to investors, reducing demand for it.
On the other hand, if the Federal Reserve decides to maintain its policy of raising interest rates to combat inflation, the US dollar could see further strength. This could occur if economic data shows improvement in the US economy, reinforcing market expectations of higher interest rates in the future.
Global Tensions and Their Impact on the Dollar
Global economic and political tensions remain a factor influencing the movement of the US dollar. If the trade conflict with China continues or tensions with other trading partners escalate, the dollar could experience significant volatility. However, the dollar is considered a global reserve currency, meaning demand for it may remain strong in times of economic crisis.
Moreover, trade wars could increase demand for the dollar as a safe haven. In the event of global economic shocks, investors may turn to the dollar as a safe investment instrument, strengthening it. Factors Affecting the Dollar in the Future
US Inflation: If inflation continues to rise, the Federal Reserve may continue raising interest rates to combat inflationary pressures, which could strengthen the dollar.
Trade Policy: Tariffs and other trade policies may put pressure on the dollar. If trade wars escalate, the dollar may decline due to a decline in global trade.
Geopolitical Tensions: Major global events, such as wars or financial crises, could increase demand for the dollar as a safe haven.
