Fundamental Factors Affecting the US Dollar Trend

After experiencing a series of fluctuations including declines and rebounds in recent years, the US dollar has now entered a rather delicate phase. When the direction of the dollar is unclear, it becomes quite challenging for investors to accurately seize investment opportunities. Therefore, it is essential to analyze some fundamental factors that influence the dollar's movement.

The Federal Reserve (Fed) is the core institution guiding US dollar policy. The Federal Open Market Committee (FOMC) is primarily responsible for formulating monetary policy, including announcing key interest rate adjustments eight times a year. Its 12 members consist of government officials and presidents of the New York and regional Federal Reserve Banks.

The US Treasury Department is responsible for issuing US government bonds and formulating fiscal budgets. Although the Treasury has no authority over monetary policy, its comments on the dollar can significantly impact the exchange rate.

The Federal Funds Rate, the most important interest rate indicator in the US, represents the overnight lending rate between depository institutions. When the Fed wishes to send a clear monetary policy signal to the market, it announces interest rate adjustments, causing substantial fluctuations in stock, bond, and currency markets. Additionally, the price of Federal Funds Rate futures contracts directly reflects market expectations for this rate.

The Discount Rate is the interest rate at which the Fed lends to commercial banks. Although this is a symbolic rate indicator, its changes can sometimes convey strong policy signals. The discount rate is generally lower than the federal funds rate.

The 30-year Treasury Bond, also known as the long bond, is the most important market indicator for measuring inflation. A decline in bond prices due to inflation—i.e., a rise in yields—may put pressure on the dollar. With the implementation of the US Treasury's "refinancing" plan, the 30-year Treasury bond is gradually being replaced by the 10-year Treasury bond as a benchmark.

At different stages of the economic cycle, various economic indicators affect the dollar differently, such as labor reports, the Consumer Price Index (CPI), Gross Domestic Product (GDP), international trade levels, and industrial production indicators. When inflation does not pose a threat to the economy, strong economic indicators tend to support the dollar's exchange rate. Conversely, when inflation becomes a significant threat, strong economic indicators may weaken the dollar. Additionally, financial or political turmoil in emerging markets can drive up the price of dollar-denominated assets, indirectly boosting the dollar's exchange rate as investors seek safe-haven assets.

Eurodollars refer to US dollar deposits held in banks outside the US. Their interest rate differentials serve as a valuable benchmark for assessing foreign exchange rates. For example, the larger the positive spread between Eurodollar and Euroyen deposit rates, the more likely the USD/JPY exchange rate is to find support.

The US Stock Market is represented by three major indices: the Dow Jones Industrial Average, the S&P 500, and the Nasdaq. Among these, the Dow Jones Industrial Average has the greatest impact on the dollar's exchange rate, showing a highly positive correlation.