In the early European trading session on Thursday, the USD/TRY exchange rate climbed close to the 38.00 mark. This upward movement came as the US Dollar strengthened ahead of the release of the weekly Initial Jobless Claims data. The pair’s appreciation was also buoyed by broader market dynamics influenced by recent Federal Reserve decisions and geopolitical developments in Turkey.
Fed’s Policy Impact on US Dollar and Yields
During its March meeting on Wednesday, the Federal Reserve decided to keep the federal funds rate steady within the 4.25% – 4.5% range. Fed Chair Jerome Powell remarked that “Labor market conditions are solid, and inflation has moved closer to our 2% longer – run goal, though it remains somewhat elevated.” Despite this, the Fed reaffirmed its outlook for two rate cuts later this year, which led to a depreciation in US yields. At the time of writing, the 2 – year yield stood at 3.97% and the 10 – year yield at 4.24%.
However, the path of the US Dollar is not without uncertainties. While the Fed’s indication of future rate cuts could potentially put downward pressure on the currency, the ongoing uncertainty surrounding US President Donald Trump’s tariff policies adds an extra layer of caution for traders. Additionally, the Fed’s decision to slow the pace of quantitative tightening, due to concerns over reduced liquidity and risks related to government debt limits, has also had an impact on the bond market, with US Treasury bonds gaining traction.
Turkish Lira in Jeopardy Amid Political Unrest
The Turkish Lira is facing significant headwinds as political unrest has erupted following the arrest of Istanbul Mayor Ekrem Imamoglu. Imamoglu’s detention on Tuesday has sparked widespread protests, the largest in years. Many political analysts consider him to be President Recep Tayyip Erdogan’s strongest rival and a likely opposition candidate for the 2028 presidential election. This political turmoil has added to the instability in the Turkish financial markets, making the Lira less attractive to investors.
Turkey’s Monetary Policy and Economic Outlook
Earlier this month, the Central Bank of the Republic of Türkiye (CBRT) made a significant move by cutting its benchmark one – week repo auction rate by 250 basis points to 42.5%, the lowest level since December 2023. The Monetary Policy Committee (MPC) justified this decision by pointing to a decline in the core inflation trend in February, after an increase in January (39.05% vs. 42.12%). Although there are signs of supportive domestic demand for disinflation and improving inflation expectations, risks still loom large in Türkiye. The central bank has reaffirmed its commitment to maintaining a tight monetary policy stance until inflation is under control and price stability is achieved.
Understanding the US Dollar’s Role in Global Markets
What is the US Dollar?
The US Dollar (USD) serves as the official currency of the United States of America. It is also ‘de facto’ currency in many other countries, circulating alongside local currencies. According to 2022 data, it is the world’s most heavily traded currency, accounting for over 88% of all global foreign exchange turnover, with an average daily transaction volume of $6.6 trillion. After World War II, the USD replaced the British Pound as the world’s reserve currency. Historically, the US Dollar was backed by gold, but this changed in 1971 with the end of the Gold Standard under the Bretton Woods Agreement.
How Fed Decisions Affect the US Dollar
Monetary policy, determined by the Federal Reserve (Fed), is the most crucial factor influencing the value of the US Dollar. The Fed has a dual mandate: to ensure price stability (control inflation) and promote full employment. Its main tool for achieving these goals is adjusting interest rates. When inflation rises above the Fed’s 2% target, the Fed raises rates, which strengthens the USD. Conversely, when inflation drops below 2% or the unemployment rate is high, the Fed may lower rates, causing the USD to weaken.
Quantitative Easing and Its Impact on the US Dollar
In extreme economic situations, the Federal Reserve can implement quantitative easing (QE). QE is a non – standard policy measure used when the credit market freezes, typically because banks are reluctant to lend to each other due to fears of counterparty default. It involves the Fed printing more dollars and using them to buy US government bonds, mainly from financial institutions. This policy usually leads to a weaker US Dollar. It was notably used by the Fed to combat the 2008 Great Financial Crisis.
Quantitative Tightening and Its Influence on the US Dollar
Quantitative tightening (QT) is the opposite of QE. It occurs when the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from maturing bonds. This process is generally positive for the US Dollar as it reduces the money supply in the market.
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