• The US dollar has retreated to 105 from 104 last week
  • The upcoming CPI data is expected to influence the Federal Reserve's interest rate decisions
  • The US dollar holds a substantial share of approximately 60% in global foreign currency reserves

Harare- The dollar has dipped to 105 from 104 last week with the highest being achieved in July at 99.9 as investors adopted a cautious approach while awaiting important U.S. inflation data. The upcoming release of the US Consumer Price Index (CPI) data for August is anticipated to have a significant impact on the Federal Reserve's interest rate decisions for the remainder of the year.

the US Dollar holds a significant share of close to 60% in global foreign currency reserves. According to International Monetary Fund (IMF), The greenback's share of reserves rose to 59% in the first quarter of the year, from 58.6% in the last three months of 2022. The euro's share, however slipped to 19.8% in the first quarter, down from 20.4% in the previous three months.

This indicates that central banks around the world hold a substantial portion of their reserve assets in US Dollars. The US Dollar's status as a dominant reserve currency is attributable to factors such as the economic size and stability of the United States, the depth and liquidity of its financial markets, and the widespread usage of the US Dollar in international trade and financial transactions.

The United States is set to release consumer inflation data on Wednesday and producer inflation figures on Thursday. The inflation numbers could potentially exceed expectations due to rising energy prices. This could increase the likelihood of the Federal Reserve implementing another 25-basis-point interest rate adjustment in November.

However, in anticipation of their policy-setting meeting this month, Federal Reserve policymakers have expressed a clear stance: they are not eager to raise interest rates, but they are also hesitant to declare complete success.

This mixed sentiment has had an impact on the financial markets. The US dollar experienced a 0.5% decline, while benchmark 10-year bond yields decreased by 0.3%. As a result, non-yielding assets like gold have become more appealing to overseas buyers. The decrease in bond yields and the depreciation of the US dollar have contributed to the attractiveness of gold as an alternative investment.

Last week, there was a positive development in the US labour market as new unemployment claims dropped to their lowest level in over six months during the final week of August. This outcome came as a surprise to the market, as expectations had been for a modest increase in claims. This data contradicted previous indications of a slight weakening in the labour market. The decline in unemployment claims suggests a potential improvement in the job market and provides a positive signal for the overall economy.

In another positive economic indicator, the ISM Services Purchasing Managers' Index (PMI) in the US experienced an unexpected increase, reaching a six-month high in August. This data suggests that the services sector in the US has displayed resilience in the face of high borrowing costs. The PMI is a gauge of business activity and sentiment within the services sector, which encompasses a wide range of industries such as finance, healthcare, and retail. The higher-than-expected reading indicates that the services sector has been able to maintain its growth momentum despite potential challenges posed by borrowing costs. This resilience is a positive sign for the overall health of the US economy.

About Dollar Index

The dollar index, also known as the U.S. Dollar Index (USDX), is a measure of the value of the United States dollar relative to a basket of foreign currencies. It provides a weighted average of the dollar's exchange rates against a group of major currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc.

The purpose of the dollar index is to track and gauge the overall strength or weakness of the U.S. dollar in the foreign exchange market. The US Dollar accounts for circa 60% in foreign reserves. It serves as a benchmark for traders, investors, and policymakers to assess the dollar's performance against other currencies and to monitor trends in the currency markets.

A higher dollar index value indicates a stronger U.S. dollar, while a lower value suggests a weaker dollar. It is used by market participants to analyse currency trends, make investment decisions, and manage foreign exchange risks.

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