The Federal Reserve, that is, the Federal Reserve Bank of the United States and the Central Bank of the United States, formulates monetary policy completely independently. The main policy indicators of the Federal Reserve include: open market operation, discount rate and expected annualized interest rate of federal funds.
Expected annualized interest rate of federal funds: The most important indicator of expected annualized interest rate is also the expected annualized interest rate of overnight loans of savings institutions.
Discount rate: the expected annualized interest rate charged by the Federal Reserve when commercial banks apply for loans from the Federal Reserve due to emergencies such as reserves.
2. Adhesion factor
There are 30-year treasury bonds and 10-year short-term treasury bonds that affect the exchange rate of the US dollar.
There is no clear relationship between the exchange rate of long-term bonds and the US dollar, but there is generally the following relationship: because inflation leads to the decline of bond prices, that is, the expected annualized rate of return rises, which may put pressure on the US dollar.
The difference of expected annualized rate of return between bonds will affect the exchange rate. If the expected annualized rate of return on dollar assets is high, the exchange rate of the dollar will be pushed up.
3. Factors of the Ministry of Finance
The U.S. Treasury Department is responsible for issuing government bonds and making budgets. The Ministry of Finance has no say in monetary policy, but its comments on the US dollar may have a greater impact on the exchange rate of the US dollar.
4. Securities index
There are three stock indexes that affect the exchange rate of the US dollar: Dow Jones Industrial Average, Standard & Poor's 500 Index and Nasdaq Index. Among them, the Dow Jones Industrial Average has the greatest impact on the US dollar exchange rate. Since the mid-1990s, there has been a great positive correlation between the Dow Jones Industrial Average and the US dollar exchange rate (because foreign investors buy American assets).
5. Eurodollars
There are two kinds of Eurodollars that affect the exchange rate of the US dollar, namely, three-month Eurodollar deposits and three-month Eurodollar futures contracts.
Eurodollar refers to dollar deposits in foreign banks in the United States. This difference in the expected annualized interest rate of deposits can be used as a valuable benchmark for evaluating the expected annualized interest rate of foreign exchange. Take USD/JPY as an example. When the positive difference between Eurodollar and Euroyen deposits is large, the USD/JPY exchange rate is more likely to be supported.
The price difference between the three-month Eurodollar futures contract and the three-month Euroyen futures contract is the basic change that determines the future trend of USD/JPY.
6. Other factors
Other factors that affect the exchange rate of the US dollar include the cross exchange rate, the expected annualized interest rate futures contract of the federal funds and the economic data of the United States.
The rise and fall of the cross will affect the exchange rate of the dollar. The expected annualized interest rate of the value of the federal funds futures contract shows the market's expectation of the expected annualized interest rate of the federal funds (related to the contract expiration date), which is the most direct measure of the Fed's policy. Among the economic data released in the United States, the most important ones include: labor force report (salary level, unemployment rate and average hourly wage), CPI (consumer price index), PPI, GDP, industrial production, housing starts, housing permits and consumer confidence.