The NZD/USD pair trades 0.16% higher to near 0.5980 during the Asian trading session on Wednesday. The Kiwi pair gains as the US Dollar (USD) faces selling pressure after United States (US) President Donald Trump delivered his first State of the Union (SOTU) address of his second administration before a joint session of Congress.
At the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, is down 0.15% to near 97.75.
In his speech, US President Trump praised his economic achievements and called “tariffs” one of the key reasons behind the economic turnaround. Trump also criticized the US Supreme Court (SC) for ruling against his tariff policy, calling it “unfortunate” and saying that “over time, tariffs paid by foreign countries will substantially replace the system of income tax”.
Broadly, the US Dollar remains firm on the expectation that the Federal Reserve (Fed) will hold interest rates steady in the March and April policy meetings. On Monday, Fed Governor Christopher Waller, who remained an outspoken dove in the past few months, stated that he could support leaving interest rates unchanged in the March policy meeting, citing the surprise uptick in the employment data.
Meanwhile, the New Zealand Dollar (NZD) trades broadly calm in a light economic calendar week. On the monetary policy front, there seems to be less urgency for interest rate hikes as Reserve Bank of New Zealand (RBNZ) Governor Anna Breman said in the monetary policy announcement this month that growth should pick up this year amid improving economic conditions, without reigniting strong inflationary pressures.
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.
Source: https://www.fxstreet.com/news/nzd-usd-rises-to-near-05980-as-us-dollar-corrects-after-trumps-sotu-speech-202602250324
