U.S. currency characteristics
The main characteristics of U.S. dollar bills
Currency name: U.S. dollar (UNITED STATES DOLLAR)
Issuing agency: U. S. FEDERAL RESERVE BANK
Currency symbol: USD
Currency carry: 1 USD = 100 cents (CENTS)
Denominations of banknotes: 1, 2, 5, 10, 20, 50, 100 yuan in seven types. Large-denomination banknotes of 500 and 1,000 yuan denominations were previously issued, but they are no longer in circulation. There are 1 point, 5 points, 10 points, 25 points, 50 points, etc.
Since 1913, the United States established the Federal Reserve System and issued Federal Reserve Notes. More than 99% of the current banknotes in circulation are Federal Reserve Notes. The right to give US dollars belongs to the U.S. Department of the Treasury, and the competent authority is the Treasury. The Federal Reserve Bank is responsible for the specific issuance business. The US dollar is the base currency in foreign exchange exchanges and the main currency in international payments and foreign exchange transactions. It occupies a critical position in the global foreign exchange market.
The U.S. dollar is also known as the "greenback."
The earliest paper currency in the United States was approved and issued by the "Continental Conference" of the coalition regime of 13 colonies, called "Continental Currency." In 1863, the Ministry of Finance was authorized to start issuing banknotes, printed on the back in green, called "greenback," and is still in use today.
U.S. dollar index description
Unexpectedly, the US dollar index does not come from CBOT or CME but the New York Cotton Exchange (NYCE). Founded in 1870, the New York Cotton Exchange was initially formed by cotton merchants and intermediaries. It is currently the oldest commodity exchange in New York and the most crucial cotton futures and options exchange globally. In 1985, the New York Cotton Exchange established a financial department and formally entered the global economic commodity market. The first to be launched was the US dollar index futures. The calculation principle of US dollar index futures is based on the trade volume between significant countries in the world and the United States. It calculates the overall strength of the US dollar in a weighted manner, with 100 being the dividing line between strength and weakness. A total of 10 countries have been adopted as the calculation targets, with Euro, Japanese Yen, Swiss Franc, and British Pound as the mainstay. Price influencing factors
The overall performance of the U.S. economy-currency strength is a manifestation of national strength
a. Trade Deficit
The U.S. economy has continued to expand since the second half of 1999. Strong consumer demand and the substantial expansion of corporate investment have led to a continuous and significant increase in imports. However, exports have not been able to grow, resulting in the constant development of the trade deficit gap. It stands to reason that this At this time, it must be resolved through the effect of currency devaluation. However, because the United States still adheres to a firm dollar policy, its trade deficit continues to expand, which will inevitably affect the strong position of the dollar in the long run.
b. Unemployment Rate (Unemployment Rate)
At the end of 1999, the U.S. unemployment rate fell to the lowest level since the 1960s. Due to concerns that the labor market contraction would lead to inflation, which would reduce corporate profits, the FED began to adopt a series of tightening monetary policies, which almost caused the crisis of a hard landing in the U.S. economy. Unemployment rate In March 2001, it reached a new high in recent years.
c. Profit Earning
Affected by the sharp increase in labor costs, capital costs, and the slowdown in consumption, the profitability of US companies has been declining year by year. Since the beginning of this year, the continuous release of corporate profit warnings and downgrading of financial forecasts will seriously affect the strong position of the US economy. Threatened.
d. Growth of Productivity
To continue to grow productivity, even if labor costs increase, it will not lead to inflation even if employment costs rise. Therefore, the key to a smooth, soft landing for the United States will fall on productivity. However, since the beginning of this year, capital utilization and capital equipment expenditures have repeatedly hit new lows, which is not optimistic news for increased productivity. Recently, all walks of life, including Greenspan, have urged the Bush administration to accelerate the cultivation of skilled labor. This plan will have the opportunity to improve the labor force's structure significantly, thereby increasing productivity. Overall, it is estimated that this year's productivity growth will gradually flatten out, and it still has the power to curb inflation.
Trends in U.S. interest rates
Since the United States has a relatively strong and independent central bank, monetary decisions critically influence the economy's overall performance. Therefore, every routine interest rate adjustment meeting of the Federal Reserve will have a more or less impact on the foreign exchange market. Since interest rates directly affect the fixed income of foreign currency deposits, the strength of the US dollar index has been dramatically impacted by interest rate adjustments. In the past years, when there was an emphasis on fixed currency returns, the higher the deposit interest rate of a country’s currency could attract more international funds for arbitrage, making the exchange rate stronger. However, after the high-tech stocks in the US stock market surged in recent years, interest rates have risen. The overall performance of the stock market is unfavorable. Instead, international funds are repatriated from countries that have adopted tightening monetary policies, and the exchange rate has also weakened. The trend of interest rates depends on those mentioned above overall economic factors, such as inflation rate, money supply growth rate, economic growth rate, and central bank policies. Therefore, the market's expectations for the future level of US interest rates will affect the price of the US dollar index.
Stock market performance
If a country’s stock market performs well, it will attract international capital into an investment, which in turn will drive the exchange rate to rise. Representing this new economic boom in Baumian stocks, the staggeringly high return on investment has made high-tech stocks the world's super attracting money machine, and the U.S. stocks and foreign exchange markets have also started a wave of long calls.
The relative strength of other major currencies-Euro
After the euro's launch, the Deutsche mark, French franc, Italian lira, Dutch dollar, and Belgian franc were combined into one. The euro has become the most crucial currency with weight, accounting for 57.6% of the total U.S. dollar index, which has a huge impact. The value also tends to concentrate on the euro, the yen, and the pound sterling. Therefore, the monetary policy trends of the European Central Bank and the economic performance of the Eurozone are indispensable elements for observing the strength of the US dollar index.
Factors affecting the U.S. dollar
Fundamental factors affecting the U.S. dollar
Federal Reserve Bank (Fed):
The Central Bank of the United States formulates monetary policy ultimately independently to ensure that the economy obtains the most significant degree of non-inflationary growth. Fed's leading policy indicators include open market operations, discount rate (Discount Rate), federal funds rate (Fed Funds rate).
Federal Open Market Committee (FOMC):
The Federal Open Market Committee and the FOMC are mainly responsible for formulating monetary policy, including making eight key interest rate adjustment announcements a year. The FOMC has a total of 12 members, including seven government officials, the President of the Federal Reserve Bank of New York, and four other members elected from the presidents of the other 11 local Federal Reserve Banks for a one-year term.
Interest rate, namely Fed Funds Rate, is the most crucial interest-rate indicator, and it is also the overnight loan interest rate for mutual loans between savings institutions. When the Fed hopes to send a clear monetary policy signal to the market, it will announce a new level of interest rates. Each such announcement will cause more significant turbulence in the stock, bond, and currency markets.
The discount rate is the interest rate charged by the Fed when commercial banks apply for loans from the Fed due to emergencies such as reserves. Although this is a symbolic interest-rate indicator, its changes will also express strong policy signals. The discount rate is generally less than the federal funds rate.
30-year Treasury Bond:
30-year Treasury bills, also known as long-term bonds, are the most critical indicator of inflation in the market. In many cases in the market, bond yields rather than prices are used to measure bond grades. Like all claims, 30-year Treasury bills are negatively correlated with prices. There is no clear link between long-term bonds and the exchange rate of the US dollar. However, there is generally the following link: a fall in bond prices due to inflation, that is, an increase in yields may put pressure on the US dollar. Some economic data may cause these considerations.
However, with implementing the U.S. Treasury Department's "borrow new debt to repay the old debt" plan, the issuance of 30-year Treasury bills began to shrink. Then the status of 30-year Treasury bills as a benchmark began to give way to 10-year Treasury bills.
According to different stages of the economic cycle, some economic indicators have other effects on the US dollar: when inflation is not a threat to the economy, solid economic indicators will support the US dollar exchange rate; when the threat of inflation to the economy is more prominent, strong Economic indicators will suppress the US dollar exchange rate, one of the means is to sell bonds.
As a benchmark for asset levels, long-term bonds are generally affected by global capital flows. Financial or political turmoil in emerging markets will push up U.S. dollar assets. At this time, U.S. dollar assets, as a hedging tool, will indirectly push up the U.S. dollar exchange rate.
3-month Eurodollar Deposits:
3-month Eurodollar deposit. Eurodollars refer to U.S. dollar deposits held in foreign banks in the United States. For example, the Japanese yen deposits deposited in Japanese banks and foreign banks are called "European Japanese Yen." This difference in deposit interest rates can be a valuable benchmark for evaluating foreign exchange interest rates. For example, take the USD/JPY as an example. When the positive difference between Eurodollar and Euroyen deposits is more tremendous, the USD/JPY exchange rate is more likely to be supported.
10-year Treasury Note:
10-year short-term Treasury bill. When we compare the yields of the same types of bonds between countries, we generally use 10-year short-term Treasury bills. The difference in bond yields will affect the exchange rate. If the return on US dollar assets is high, the exchange rate will push up the US dollar exchange rate.
Ministry of Finance. The U.S. Treasury Department is responsible for issuing government bonds and formulating fiscal budgets. The Ministry of Finance has no say in monetary policy, but its comments on the U.S. dollar may significantly impact the U.S. dollar exchange rate.
Economic data. Among the financial data released by the United States, the most important ones include labor force report (salary level, unemployment rate, and average hourly income), CPI (Consumer Price Index), PPI, GDP (gross domestic product, gross domestic product), The level of international trade, industrial production, housing starts, housing permits, and consumer confidence.
stock market. The three main stock indexes are Dow Jones Industrials Index (Dow, Dow Jones Industrials Index), S&P 500 (Standard & Poor's 500 Index), and NASDAQ (Nasdaq Index). Among them, the Dow Jones Industrial Index has the most significant impact on the US dollar exchange rate. Since the mid-1990s, the Dow Jones Industrials Index and the US dollar exchange rate have had a tremendous positive correlation (because foreign investors purchased US assets). The three main factors affecting the Dow Jones Industrial Index are 1) company income, including expected and actual income; 2) interest rate expectations; 3) global political and economic conditions.
Cross Rate Effect:
Cross exchange rate impact. The rise and fall of cross-trading will also affect the US dollar exchange rate.
Fed Funds Rate Futures Contract:
Federal funds rate futures contract. This contract value shows the market's expected value of the federal funds rate (related to the contract's expiry date) and is the most direct measure of Fed policy.
3-month Eurodollar Futures Contract:
The 3-month Eurodollar futures contract. Like the federal funds rate futures contract, the 3-month Eurodollar futures contract also impacts the 3-month Eurodollar deposits. For example, the interest rate difference between the 3-month Eurodollar futures contract and the 3-month European yen futures contract is the fundamental change that determines the future trend of USD/JPY.