Factors affecting the US dollar are numerous. Only by mastering these factors can one take effective measures to make decisions beneficial to the national economy. In this article, I will explain the factors influencing the US dollar one by one.
The Federal Reserve Bank of the United States, abbreviated as the Fed, is the US central bank. It independently formulates monetary policy to ensure maximum non-inflationary economic growth. The Fed's main policy indicators include: open market operations, Discount Rate, and Federal Funds Rate.
The Federal Open Market Committee (FOMC) is mainly responsible for formulating monetary policy, including eight key interest rate adjustment announcements each year. The FOMC has 12 members, consisting of 7 government officials, the President of the Federal Reserve Bank of New York, and 4 members elected from the other 11 regional Federal Reserve Bank presidents for one-year terms.
The Federal Funds Rate is the most important interest rate indicator and is the overnight lending rate between savings institutions. When the Fed wishes to express a clear monetary policy signal to the market, it will announce a new interest rate level. Each such announcement causes significant volatility in stock, bond, and currency markets.
The Discount Rate is the interest rate charged by the Fed when commercial banks apply for loans due to emergency situations such as reserve requirements. Although this is a symbolic interest rate indicator, its changes also express strong policy signals. The Discount Rate is generally lower than the Federal Funds Rate.
30-year Treasury bonds, also called long-term bonds, are the most important indicator for measuring inflation in the market. In most market situations, bond yields rather than prices are used to measure bond ratings. Like all debt securities, 30-year Treasury bonds are negatively correlated with price. There is no clear link between long-term bonds and the dollar exchange rate, but generally, the following relationship exists: a decline in bond prices due to inflation concerns, i.e., rising yields, may put pressure on the dollar. These considerations may be triggered by certain economic data. However, as the US Treasury implements its "borrow new to repay old" plan, the issuance of 30-year Treasury bonds has begun to shrink, and the 30-year Treasury bond's status as a benchmark is giving way to the 10-year Treasury bond.
Depending on different stages of the economic cycle, some economic indicators have different effects on the dollar: when inflation is not a threat to the economy, strong economic indicators support the dollar exchange rate; when the threat of inflation to the economy is more apparent, strong economic indicators may put pressure on the dollar exchange rate, with one method being selling bonds.
