US Dollar Index flattens around 99.00 ahead of US markets opening after long weekend
- The US Dollar Index trades flat around 99.00 as investors seek fresh developments about US-Iran negotiations.
- US Interior Secretary Burgum said that President Donald Trump will come through with a great deal on Iran.
- Investors expect the Fed to hold interest rates the entire year or raise them.
The US Dollar (USD) trades almost flat ahead of the United States (US) stock markets opening after an extended weekend during the late European trading session on Tuesday, with the US Dollar Index (DXY) wobbling around 99.00 after giving back its early gains. US markets were closed on Monday due to Memorial Day.
The US Dollar is expected to trade sideways as investors await concrete announcements from Iran and the US regarding negotiations over the permanent deal. Latest comments from Tehran, as reported by Iran’s Fars News agency, that the unfreezing of Iran's funds is the last serious sticking point with Washington, which is being resolved through Qatar mediation. However, there has been no official confirmation.
Meanwhile, US Interior Secretary Doug Burgum has announced that President Donald Trump will come through with a great deal on Iran.
These headlines indicate that the US and Iran are close to reaching a deal soon, a scenario that will be favorable for riskier assets and diminish the appeal of safe-haven assets, such as the US Dollar.
The US Dollar has outperformed in the past few months due to the war in the Middle East, as it led to a significant surge in energy prices, which prompted US inflationary pressures, and forced traders to price out the possibility of interest rate cuts by the Federal Reserve (Fed) this year.
According to the CME FedWatch tool, the odds of the Fed holding interest rates at their current levels this year are 43.5%, while the rest are in favor of at least one interest rate hike this year. This is a sharp turnaround from two interest rate cuts anticipated before the war started.
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
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
