- USD/CAD experiences a slight increase as the USD Index climbs nearly 0.5%, surpassing the 100.00 mark.
- The US Dollar strengthens despite a faster-than-anticipated contraction in the US ISM Manufacturing PMI for April.
- The Bank of Canada (BoC) anticipates that the full impact of previous interest rate reductions has yet to materialize within the Canadian economy.
The USD/CAD pair is trading slightly higher, approaching the 1.3820 level during Thursday’s North American trading session. This modest upward movement in the Loonie pair occurs despite significant buying interest in the US Dollar (USD) following the release of the latest Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI) data from the United States (US).
The US Dollar Index (DXY) has risen by almost 0.5%, exceeding the 100.00 threshold, even as the ISM reported a continued decline in manufacturing sector activity, accelerating beyond previous expectations. The Manufacturing PMI registered at 48.7 in April, a decrease from March’s reading of 49.0, but slightly above consensus estimates of 48.0. It is important to note that a reading below 50.0 indicates a contraction in overall economic activity within the manufacturing sector. The market is closely watching how the Federal Reserve will react to this mixed economic data, with expectations for potential adjustments to monetary policy in the coming months.
The near-term outlook for the US Dollar remains somewhat uncertain, particularly given ongoing concerns surrounding trade relations between the United States and China. Recent statements emanating from the White House suggest that formal trade discussions between the two nations have not yet commenced. This lack of progress in trade negotiations is contributing to investor apprehension and weighing on the dollar’s performance.
US Trade Representative Jamieson Greer stated in a Wednesday interview with Fox News, as reported by the South China Morning Post (SCMP), that trade discussions with Beijing have not been initiated since the implementation of reciprocal tariffs. This statement underscores the current impasse in trade relations between the two economic giants.
In Canada, market participants are keenly awaiting further insights into the Bank of Canada’s (BoC) intentions regarding potential interest rate reductions, with the June policy meeting being a focal point. The BoC’s meeting minutes from April revealed that the central bank opted to maintain its benchmark interest rate unchanged at 2.75%, citing uncertainties surrounding the economic outlook in light of additional tariffs announced by US President Donald Trump on April 2nd. This decision marked the first instance in which the BoC held borrowing rates steady after implementing seven consecutive rate cuts.
The BoC minutes further highlighted that policymakers continue to believe that the full effects of previous interest rate reductions have yet to be fully absorbed by the economy. Consequently, the central bank deemed that implementing further policy easing at this juncture could be considered a “premature” action. This cautious approach reflects the BoC’s commitment to carefully assessing the economic landscape before making any further adjustments to its monetary policy stance.
The minutes also indicated that the central bank will maintain a flexible approach to monetary policy adjustments, contingent upon “medium- to long-term inflation expectations remaining anchored,” according to Reuters. This statement emphasizes the BoC’s unwavering commitment to maintaining price stability and ensuring that inflation remains within its target range. The central bank will continue to closely monitor inflation indicators and economic data to inform its future policy decisions.
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.
