United States Dollar Index (DXY) steadies around 100.00 as US-Iran tensions lend support

DXY struggles to capitalize on the previous day's solid recovery move from mid-June lows.
The US-Iran uncertainty keeps the geopolitical risk premium in play and acts as a tailwind.
Fed rate hike bets further lend support to the buck as bulls await the US NFP report on Friday.

Haresh Menghani FXStreet

The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, struggles to capitalize on a modest Asian session uptick and currently trades around the 100.00 psychological mark, nearly unchanged for the day. The index, for now, seems to have stalled the previous day's solid recovery move from its lowest level since mid-June, though the fundamental backdrop warrants some caution for bearish traders.

The optimism over a potential US-Iran peace deal faded rather quickly after Iran said on Monday there were no talks underway with the US and no plans for any meetings. Meanwhile, US President Donald Trump had cited resumption of negotiations as justification for calling off attacks over the weekend. Adding to this, unconfirmed reports of drone strikes on US assets in Kuwait prompt traders to again price in the geopolitical risk premium, which, in turn, is seen offering some support to the safe-haven US Dollar (USD).

Meanwhile, Mohsen Rezaee, a senior military adviser to Iran's Supreme Leader, said that Tehran will not permit any shipping route through the strategic waterway other than the one designated by the Islamic Republic. Rezaee further warned that US vessels and forces could face serious risk and casualties if the standoff over the strategic waterway continues. This lends some support to crude oil prices, reviving inflation fears and keeping bets for at least one rate hike by the US Federal Reserve (Fed) firmly on the table.

Adding to this, data released on Monday showed that US manufacturing sector activity increased to the highest level in more than four years in July. In fact, the US ISM Manufacturing PMI rose to 55.6 last month from 53.3 in June, surpassing consensus estimates. This reaffirms hawkish Fed expectations, validating the near-term positive outlook for the DXY. Traders, however, might refrain from placing aggressive bets and opt to wait for the release of US employment details, or the Nonfarm Payrolls (NFP) report, due on Friday.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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