United States Dollar Index holds gains near 100.00 due to renewed US-Iran tensions
- US Dollar Index gains support as renewed US-Iran peace deal concerns keep inflation and prolonged high interest rates in focus.
- President Trump threatened strikes on Iran if Hezbollah continues attacking Israel, clouding hopes for a US-Iran peace deal.
- Fed policymakers project a rate hike this year, with markets pricing in an increase by September.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, recovers its recent losses from the previous trading day and is hovering around 100.80 during the Asian hours on Monday.
The Greenback receives support amid renewed concerns over a US-Iran peace deal, a development that keeps both inflation risks and the prospect of prolonged high interest rates at the forefront of investor worries.
According to a CNBC report on Sunday, US President Donald Trump threatened direct strikes on Iran if Hezbollah continues its attacks on Israel. This warning has severely clouded the outlook for diplomatic progress between Washington and Tehran, completely dismantling the current peace framework, even as Vice President JD Vance met with Iranian officials for the first round of talks under an interim deal.
Meanwhile, Tehran simultaneously announced it had once again closed the strategic Strait of Hormuz. While Iranian state media reported that Tehran had completely suspended negotiations in response to Trump's remarks, sources close to the matter indicated that discussions are quietly ongoing.
The Federal Reserve (Fed) kept interest rates steady last week but adopted a decidedly hawkish tone. Notably, 9 out of 19 Fed policymakers now project at least one interest rate hike this year, with market investors pricing in a potential increase as early as September.
"The resurgent US dollar, powered by the Fed's newly hawkish tone under Kevin Warsh, has stolen the spotlight," noted Tim Waterer, chief market analyst at KCM Trade, highlighting the growing headwinds facing precious metals.
US Dollar FAQs
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.
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.
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.
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.