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United States Dollar Index gathers strength above 99.00 on US-Iran truce deal uncertainty

  • US Dollar Index strengthens to around 99.05 in Monday’s early Asian session. 
  • Iran's Araghchi said talks and message exchanges with the US are ongoing.
  • Traders await the US May employment report later on Friday for fresh impetus. 

The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, currently trades near 99.05 during the Asian trading hours on Monday. The DXY holds positive ground surrounding the US-Iran peace deal. The US ISM Manufacturing Purchasing Managers Index (PMI) report will be published later on Monday. 

Iranian Foreign Minister Abbas Araghchi said on Sunday that talks and message exchanges with Washington were ongoing, but stressed that no assessment of negotiations could be made until a clear outcome was reached, per the BBC. 

On Monday, US President Donald Trump has requested that edits be made to the US-Iran deal aimed at bringing an end to fighting that began earlier this year. The changes are related to the Strait of Hormuz and the removal of highly enriched uranium. 

The US employment data for May will be in the spotlight on Friday. Analysts expect the US Nonfarm Payrolls (NFP) to increase by 96K in May, and the US Unemployment Rate is projected to remain steady at 4.3% during the same period. If the report shows stronger-than-expected outcomes, this could support the DXY in the near term.

Traders are now pricing in nearly a 41.2% probability that the Fed will raise interest rates by 25 basis points (bps) by year-end, according to the CME FedWatch tool.

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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Lallalit Srijandorn

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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