US Dollar Index remains below 100.00 as Trump's remarks improve risk appetite
- US Dollar Index declines as safe-haven demand fades amid growing optimism over easing Middle East tensions.
- Trump said that the US may withdraw from the Iran conflict within two to three weeks.
- Fed’s Powell said long-term inflation expectations remain well anchored.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is extending its losses for the second successive day and hovering around 99.80 during the Asian hours on Wednesday.
The Greenback weakens amid fading safe-haven demand amid a moderation in Middle East tensions. US President Donald Trump stated on Tuesday that the United States (US) would be “leaving very soon” from the Iran war, noting that a withdrawal could take place within two to three weeks. The comments reinforce earlier remarks suggesting that US strategic objectives have largely been fulfilled, raising expectations of a relatively swift resolution to the conflict.
Iranian President Masoud Pezeshkian expressed a willingness to de-escalate regional tensions if specific guarantees are met. However, Foreign Minister Abbas Araghchi took a firmer stance, asserting that Tehran is not seeking a temporary ceasefire but rather a complete termination of the war. He stressed the need for binding assurances against future aggression as well as compensation for damages, highlighting lingering uncertainty around the conflict’s resolution.
Moreover, Federal Reserve (Fed) Chair Jerome Powell said earlier that long-term inflation expectations remain well anchored, easing concerns that higher energy prices will quickly lift inflation and reduce the urgency for policy action.
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.
