In a surprising turn of events, US President-elect Donald Trump has urged Panama to either slash the fees for using the Panama Canal or hand back control of the vital waterway to the United States. Trump criticized Panama for what he described as exorbitant charges levied on vessels navigating this crucial Central American route, as reported by Reuters.
Expressing further concerns, Trump emphasized he would not permit the canal to come under “unfavorable” control, alluding to potential Chinese influence. Meanwhile, President Mulino of Panama responded firmly on Sunday, asserting that Panama’s sovereignty is non-negotiable and clarified that China has no say in the canal’s governance. He also defended the current toll structure, emphasizing that fees weren’t decided arbitrarily.
### Market Reaction
At the moment, the US Dollar Index (DXY) remains steady, hovering at 107.80.
#### US Dollar Insights
The US Dollar (USD), America’s official currency, also functions as a de facto currency in many other nations where it circulates alongside local currencies. It’s the most actively traded currency globally, responsible for over 88% of all international foreign exchange transactions, translating to an astonishing $6.6 trillion per day as of 2022. The USD dethroned the British Pound to become the world’s reserve currency post-World War II. Historically backed by gold, the dollar moved away from the Gold Standard with the Bretton Woods Agreement in 1971.
A dominant factor influencing the US Dollar’s value is the Federal Reserve’s monetary policy. The Fed’s dual mandate involves ensuring price stability (managing inflation) and promoting full employment. Interest rate adjustments are its primary mechanism for achieving these objectives. When inflation surpasses the Fed’s 2% target, an interest rate hike is likely, boosting the dollar’s strength. Conversely, if inflation drops below the target or unemployment rises excessively, rate cuts might be enacted, potentially weakening the dollar.
In exceptional scenarios, the Federal Reserve resorts to printing more dollars through quantitative easing (QE), a strategy to increase credit flow when financial systems face gridlock. This unconventional tactic is deployed when banks hesitate to lend over default fears, as seen during the 2008 financial crisis. QE generally results in a weaker dollar.
On the flip side, quantitative tightening (QT), involves halting bond purchases from financial entities and refraining from reinvesting matured bond principals. This procedure is typically favorable for the US Dollar.
