|

United States Dollar Index holds losses after pulling back from 11-week highs

  • US Dollar Index remains subdued after pulling back from an 11-week high of 100.57 reached on Wednesday.
  • The Greenback slips as easing safe-haven demand followed a preliminary US-Iran memorandum of understanding to end the war.
  • The US Dollar may regain as half of the FOMC members expect at least one rate hike this year.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, pulled back after reaching an 11-week high of 100.57 in the previous day and is now trading around 100.30 during the Asian hours on Thursday.

The Greenback slips on easing safe-haven demand following the BBC report late Wednesday, indicating that the White House confirmed that US President Donald Trump and Iranian President Masoud Pezeshkian signed a preliminary memorandum of understanding designed to end the US-Israel war on Iran. This decisive executive action follows the electronic signing of the initial framework by U.S. Vice President JD Vance and Iranian Parliamentary Speaker Mohammad Bagher Ghalibaf earlier in the week.

However, the US Dollar could rebound on rising odds of rate hikes by the Federal Reserve (Fed) later this year. The Fed’s June Summary of Economic Projections showed half of FOMC members expect at least one rate hike this year. Despite economic disruptions linked to the conflict in Iran, resilient labor market data and persistent underlying inflation measures continue to drive tightening pressures.

The Federal Open Market Committee (FOMC) voted unanimously to maintain its benchmark federal funds rate in the range of 3.5% to 3.75%. In his first meeting since taking the helm of the US central bank, the newly appointed Federal Reserve Chairman, Kevin Warsh, vowed to aggressively restore price stability.

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.

More from Akhtar Faruqui
Share:

Editor's Picks

USD/JPY bulls pause near 160.75 amid intervention risks

USD/JPY is consolidating below 160.75 in Thursday's Asian trading, with intervention fears lending support to the Japanese Yen and capping the pair's upside amid a modest US Dollar downtick. The signing of a US-Iran peace deal to end the war and reopen the Strait of Hormuz undermines the Greenback's reserve-currency status.

AUD/USD rebounds toward 0.7050 on US-Iran deal optimism

AUD/USD bounces back toward 0.7050 in the Asian session on Thursday as the US Dollar retreats from its highest level since late March, touched in reaction to the Fed's hawkish tilt the previous day. The US and Iran electronically signed a MoU aimed at ending the war and reopening the Strait of Hormuz, boosting investors' confidence and undermining the safe-haven USD.

Gold reclaims $4,300 as USD  cuts Fed-led gains amid US-Iran peace deal

Gold attracts fresh buyers and regains $4,300 in the Asian session on Thursday, reversing part of the previous day's hawkish Fed-inspired slump to a fresh weekly low. As traders price in the possibility of a Fed rate hike this year, the signing of a US-Iran peace deal – to end the war and reopen the Strait of Hormuz – drags the safe-haven US Dollar away from its highest level since late March, offering support to the bullion.

Binance founder CZ urges governments to tokenize stock markets and launch sovereign stablecoins

Binance founder Changpeng Zhao has called on governments to tokenize their stock markets and issue sovereign stablecoins, arguing that blockchain technology can expand access to capital markets and increase the global use of national currencies. In an X post on Wednesday, CZ said countries should "tokenize their stocks, allowing worldwide buyers."

A new era for the Fed
The Fed has shifted to a more hawkish stance at the first meeting chaired by Kevin Warsh. Although rates were left unchanged, there will be meaningful adjustments to how the Federal Reserve operates in the coming months and years. There are two main takeaways from today’s meeting, firstly what the Fed did, and secondly, what they are planning to do.
Why a hawkish RBA is no longer enough to lift the Australian Dollar

The Reserve Bank of Australia delivered more than what markets expected: a hawkish hold that should have supported the Aussie. But markets widely ignored it, focusing instead on slowing economic growth and proving that central bank messaging alone isn’t always enough to drive currencies.