The US dollar is relatively stable at levels close to a one-year peak, as it has not been able to make further gains after the strong rallies recorded in the recent period, driven by what is known as the “Trump fever” following the victory of President-elect Donald Trump, which was accompanied by escalating global geopolitical tensions. This stalemate in the dollar’s movement comes as traders await more clarity on Trump’s economic policies, especially those related to protectionist policies, as well as the Federal Reserve’s approach to interest rates.
In recent trading, the dollar index saw some slight decline of 0.1% to 106.5 points against a basket of six major currencies. Despite this limited decline, the dollar still held most of the previous session’s gains, with last week approaching a one-year high of 107.07 points. Since Trump’s victory, the dollar has risen more than 2.2%, supported by market expectations that its economic policies could lead to higher inflation and maintain a more cautious stance from the Federal Reserve on steps to cut interest rates.
The volatility of the dollar’s movement reflects uncertainty in global markets, as traders are affected by a combination of expectations regarding the impact of future US policies and macroeconomic data. With the greenback remaining close to record levels, all eyes remain on any additional signals from US policymakers to determine future directions. Markets react quickly to any signals on inflation, as economic reports or statements from Fed officials can lead to large movements in the dollar. Data such as the Consumer Price Index (CPI) or future expectations of inflation rates play a big role in shaping market expectations.
The impact of inflation expectations on the USD
Inflation expectations are one of the decisive factors in determining the value of the USD, as inflation is closely related to the policies of the US central bank (Federal Reserve) and the market response to these policies. When inflation expectations increase, investors see that the future value of the USD may erode due to rising prices, leading to lower demand for the currency. In contrast, when inflation expectations are low or under control, the dollar remains in a good position, as investors consider it a safe tool that contributes to the stability of the economy.
Inflation impacts the dollar primarily through the interest policies adopted by the Federal Reserve. If inflation is expected to rise, the Fed may raise interest rates to curb rapid price growth. Raising interest rates makes the dollar more attractive to investors, because yields on dollar-denominated assets (such as U.S. bonds) rise, increasing demand for the currency.
On the other hand, if inflation expectations are low or inflation slows, the Fed may see a need for monetary policy easing, such as lowering interest rates or even implementing stimulus programs such as quantitative easing. This could lead to a weaker dollar, as low interest rates reduce returns on U.S. assets, prompting investors to look for higher-yielding investments in other markets.
Moreover, inflation expectations play a role in determining the real value of the USD. When investors expect inflation to remain high in the long run, they may turn to other assets such as gold or currencies that may be more stable than the USD.
The impact of dollar stability on global markets
The stability of the US dollar plays a pivotal role in the stability of global markets. As the main reserve currency, the dollar drives international trade and foreign reserves. When the dollar is stable, it boosts confidence in global financial markets, as the dollar is a key pillar in determining the value of goods and services traded between countries. Dollar stability reduces volatility in financial markets, facilitating cross-border trade and investment, and making it easier to set prices in many markets.
Economically, dollar stability reduces uncertainty in financial markets, as many investors rely on the dollar as a safe investment tool. When the dollar is strong and stable, it contributes to attracting more foreign investment to the United States, leading to increased capital flows and boosting the country’s economic growth. At the same time, stability in the dollar supports global commodity markets, including oil and gold, which traders price in dollars, and helps maintain stable prices worldwide.
On the other hand, a weaker USD or its sharp fluctuations can lead to significant challenges in global markets. For example, a depreciation of the dollar can increase the costs of imported goods, putting pressure on economies that depend on imports. In countries with dollar-denominated debt, a weaker U.S. currency can increase the debt burden, harming the financial stability of these countries. Dollar fluctuations also affect international investments, as it becomes difficult Companies and investors should predict production costs and returns, which can lead to a reduction in commercial and investment activities. Moreover, the stability of the USD directly affects trade relations between countries.
