NZD/USD holds onto gains near 0.5950 as US Dollar’s rally hits pause

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The NZD/USD pair clings to Wednesday’s gains near 0.5950 during the Asian trading session on Thursday. The Kiwi pair shows strength as the US Dollar’s (USD) rally hits a pause, with the US Dollar Index (DXY) struggling to extend gains above the fresh three-month high of 99.68 posted on Tuesday.

NZD/USD trades firmly near 0.5950 as the US Dollar corrects.
Iran has denied reports signaling that it is ready for talks to end the war with the US.
Investors await the US NFP data for fresh cues on the current state of US employment.

The US Dollar came under pressure after a report from the New York Times (NYT) signaled that Iran has expressed willingness for talks with the United States (US) about ending the war, which has entered its sixth day.

Operatives from Iran’s Ministry of Intelligence reached out indirectly to the Central Intelligence Agency (CIA) with an offer to discuss terms for ending the conflict, according to officials briefed on the outreach, NYT reported.

However, Tehran has denied these reports and has stated that it will continue the war with Israel and the US.

Also, the strength in precious metals indicates that global financial markets are still far from turning risk-on.

On the domestic front, improving US labor market conditions are expected to weigh on dovish Federal Reserve (Fed) prospects. The data showed on Wednesday that the US private sector created 63K fresh jobs in February, significantly higher than 50K estimates and the prior reading of 11K.

For more cues on the current state of the US employment, investors will focus on the Nonfarm Payrolls (NFP) data for February, which will be released on Friday.

Meanwhile, the New Zealand Dollar (NZD) trades broadly flat as investors seek fresh cues on the Reserve Bank of New Zealand’s (RBNZ) monetary policy outlook.

US Dollar FAQs

What is the US Dollar?

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.

How do the decisions of the Federal Reserve impact the US Dollar?

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.

What is Quantitative Easing and how does it influence the US Dollar?

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.

What is Quantitative Tightening and how does it influence the 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.