US Dollar Index holds gains above 99.00 due to renewed safe-haven demand
- US Dollar Index rises after US forces launched self-defense strikes in southern Iran on Monday.
- Trump noted that Iran deal talks are "proceeding nicely," but warned failed negotiations could trigger renewed military attacks.
- The Greenback may appreciate further as traders bet the Fed will tighten monetary policy to contain inflation.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is gaining ground after registering modest losses in the previous day and trading around 99.10 during the Asian hours on Tuesday.
The Greenback advances on rising safe-haven demand amid ongoing uncertainty surrounding the US-Iran peace agreement. Tensions flared following a Fox News report that US forces conducted self-defense strikes in southern Iran on Monday. According to a US Central Command spokesperson, the strikes targeted missile launch sites and Iranian vessels attempting to deploy mines. While the US military emphasized its commitment to protecting its forces, it maintained that it was still exercising restraint during the ceasefire.
In contrast to the military friction, Bloomberg reported on Monday that US President Donald Trump stated negotiations toward a deal to end the conflict and reopen the Strait of Hormuz were "proceeding nicely.” Traders are closely monitoring these developments, as any signs of escalation in the Middle East could further boost safe-haven US Dollar.
Adding to its strength, the US Dollar may appreciate further as traders increasingly bet that the Federal Reserve (Fed) will need to tighten monetary policy to contain inflation. According to the CME FedWatch tool, market participants are now pricing in a nearly 41.0% probability that the Fed will implement a 25-basis-point interest rate increase by the end of the year. Market attention is now turning toward the upcoming PCE inflation data for clearer signals on the Fed’s future policy path.
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
FXStreet
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.
