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Forex Today: US Dollar stabilizes as tensions in Strait of Hormuz escalate

Here is what you need to know on Tuesday, May 26:

The US Dollar (USD) stays resilient against its peers in the European session on Tuesday, following Monday's bearish movement. Although markets remain optimistic about a peace deal between Iran and the United States (US), escalating tensions in the Strait of Hormuz don't allow risk flows to dominate the action. In the second half of the day, the US economic calendar will feature the Conference Board's (CB) Consumer Confidence Index data for May and the Federal Reserve Bank of Dallas will publish the Manufacturing Business Index.

US Dollar Price Today

The table below shows the percentage change of US Dollar (USD) against listed major currencies today. US Dollar was the strongest against the New Zealand Dollar.

USDEURGBPJPYCADAUDNZDCHF
USD0.08%0.17%0.11%0.05%0.09%0.34%0.19%
EUR-0.08%0.13%0.06%-0.01%0.05%0.29%0.11%
GBP-0.17%-0.13%-0.06%-0.11%-0.08%0.15%0.00%
JPY-0.11%-0.06%0.06%-0.05%0.00%0.22%0.10%
CAD-0.05%0.00%0.11%0.05%0.07%0.31%0.14%
AUD-0.09%-0.05%0.08%-0.01%-0.07%0.24%0.05%
NZD-0.34%-0.29%-0.15%-0.22%-0.31%-0.24%-0.16%
CHF-0.19%-0.11%-0.00%-0.10%-0.14%-0.05%0.16%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).

The positive shift seen in risk mood on Monday made it difficult for the USD to find demand as investors reacted to news suggesting that the US and Iran were moving closer to signing a deal to extend the ceasefire for another 60 days, open the Strait of Hormuz fully and negotiate the remaining issues, such as Iran's nuclear program, during the truce period. However, reports of the US military targeting Iranian missile launch sites and mine-laying vessels in southern Iran in what it called "self-defense strikes" caused investors to adopt a cautious stance late Monday.

Iran's Fars news agency reported that a senior spokesperson for Iran’s Armed Forces said that any new aggression against Iran will be met with a "far more severe" response that extends beyond the region.

In the meantime, Iranian negotiators are meeting with Qatari mediators in Doha to finalize a memorandum of understanding (MOU) with the US. Reportedly, language over Iran's nuclear program and sanctions remain as point of contentions.

The USD Index clings to modest daily gains above 99.00 after losing 0.3% on Monday. The benchmark 10-year US Treasury bond yield is down about 1% on the day near 4.5% and US stock index futures rise between 0.7% and 0.9%.

EUR/USD struggles to build on Monday's gains and moves sideways below 1.1650 in the European morning on Tuesday.

GBP/USD climbed to its highest level in 10 days above 1.3500 on Monday but lost its bullish momentum early Tuesday. At the time of press, the pair was trading near 1.3480, losing 0.2% on the day.

USD/JPY stays relatively quiet at around 159.00 after closing marginally lower on Monday.

Gold (XAU/USD) reverses its direction after rising more than 1% on Monday and declines toward $4,500 early Tuesday.

NZD/USD stays under bearish pressure and loses more than 0.3% on the day near 0.5850. In the Asian session on Wednesday, the Reserve Bank of New Zealand (RBNZ) will announce monetary policy decisions. Markets widely expect the RBNZ to leave the interest rate unchanged at 2.25%.

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.

Author

Eren Sengezer

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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