US Dollar Index holds losses near 99.00 despite fading rate cut bets
|- US Dollar edges lower despite safe-haven demand amid escalating Middle East war.
- Iran war lifts oil prices, fueling inflation concerns and reducing expectations for Fed rate cuts.
- US Dollar may further strengthen as Fed officials consider further rate hikes if inflation stays above target.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, depreciates after registering modest gains in the previous session and is trading around 99.00 during the Asian hours on Thursday. However, the Greenback may regain its ground as safe-haven demand rises amid escalating Middle East war.
The US-Israel war with Iran pushes oil prices higher, fueling inflation concerns and reducing bets on Federal Reserve (Fed) rate cuts. Moreover, Fed officials continue to consider the possibility of further rate hikes if inflation remains above target.
The Iran war entered its seventh day, with Iran launching missiles and drones across the Gulf on Thursday, striking an oil refinery in Bahrain, while Israel continued airstrikes on Tehran, and the US suspended operations at its embassy in Kuwait.
US President Donald Trump said that Iranian officials reached out to him in an attempt to reach an agreement to end the war, but he insisted it was too late and that the US is pushing to destroy Iran.
Chicago Fed President Austan Goolsbee said on Friday that institutions are facing a crisis of trust. Goolsbee added that the federated structure of the central bank has worked well, adding that Fed independence is critically important to controlling inflation.
Traders await US labor data, including US Nonfarm Payrolls (NFP), where consensus expectations are around 59K for February, following January’s above-trend reading of 130K. Retail Sales are expected to fall 0.3% month-over-month in January, after a flat reading in the previous month.
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.
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