US Dollar Index drifts higher above 98.00 on US-Iran tensions
- US Dollar Index gains ground around 98.30 in Monday’s Asian session.
- Iran rejected the second round of talks with the US.
- Traders await the US March Retail Sales data later on Tuesday.
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 98.30 during the Asian trading hours on Monday. The DXY trades with mild gains on renewed US-Iran tensions.
Iran’s Foreign Ministry spokesman Esmail Baghaei said the US blockade of Iran’s ports and coastline is an act of aggression that violates the ceasefire, per the Guardian.
On Sunday, Iran said it is not planning to take part in the second round of talks with the US. This came as US President Donald Trump ordered US negotiators to travel to Pakistan just days before a ceasefire in the Middle East expires on April 22. Shaky prospects of a peace deal in the Middle East sent investors toward safe haven currency such as the US Dollar.
"The key is still the Strait of Hormuz for many, and hopes that we could see the U.S. and Iran sit down at the negotiating table before the ceasefire ends now seem remote," said Nick Twidale, chief market strategist at ATFX Global in Sydney.
The US Retail Sales report will take center stage later on Tuesday. Retail Sales is projected to show a rise of 1.3% MoM in March, compared to 0.6% in February. However, in case of softer than expected inflation outcome, this could drag the DXY lower in the near term.
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
Lallalit Srijandorn
FXStreet
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.
