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United States Dollar Index holds above 101.00 on Middle East tensions

  • US Dollar Index rises on increased safe-haven demand fueled by escalating geopolitical tensions in the Middle East.
  • Tehran refuses further negotiations until Washington honors previous commitments on transit safety and Iranian oil exports.
  • Traders expect the Fed to deliver one final interest-rate increase before the year concludes.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is remaining stronger for the second successive day, trading around 101.10 during the Asian session on Monday.

The Greenback rises on increased safe-haven demand amid heightened geopolitical tensions in the Middle East. According to Bloomberg, the US Central Command (CENTCOM) launched additional strikes on Sunday evening, aimed at weakening Iran's capability to target civilian vessels navigating the waterway.

Reuters reported that US forces have hit more than 300 Iranian targets over a three-night span, including 140 on Saturday alone, while Washington and Tehran issued conflicting declarations regarding whether the strait remains open to maritime traffic. The sudden military escalation has also severely dampened hopes for continued diplomacy. Tehran is now digging in, insisting that Washington must fully honor its previous commitments regarding shipping transit and the normalization of Iranian oil exports before any further negotiations can resume.

Additionally, the US Dollar receives support from escalating US-Iran missile strikes, which pushed oil higher and sparked fears of inflation and higher Federal Reserve (Fed) interest rates. The US Consumer Price Index (CPI) inflation data will be eyed on Tuesday for further clues on the Federal Reserve's (Fed) policy outlook. The headline CPI is expected to decline by 0.1% MoM in June, while the core CPI is projected to show a rise of 0.3% during the same period.

Traders expect the Fed to deliver one more interest-rate increase before the year concludes. Meanwhile, all eyes will be on Fed Chair Kevin Warsh as he makes his first official appearance before the US Congress this Tuesday.

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

Akhtar Faruqui

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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