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US Dollar Index strengthens above 100.00 on upbeat US NFP, geopolitical risks

  • US Dollar Index gathers strength to around 100.25 in Monday’s Asian session. 
  • US NFP rose by 178,000 in March, stronger than expected; Unemployment Rate edged lower to 4.3%. 
  • The US March ISM  Services PMI data is due later on Monday. 

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 100.25 during the Asian trading hours on Monday. The DXY edges higher on the stronger-than-expected US jobs data and heightened uncertainty in the Middle East. 

Data released by the US Bureau of Labor Statistics (BLS) on Friday revealed that the US economy added 178,000 jobs in March, compared to a 133,000 decline (revised from -92,000) in February. This reading came in better than the estimations of a 60,000 gain. The Unemployment Rate edged lower to 4.3%, though that was largely from a sharp reduction in the labor force.

Following the upbeat jobs report, futures pointed to virtually no chance of a move at the April 28-29 Federal Open Market Committee (FOMC) meeting and a 77.5% probability the Fed will stay on hold through the end of the year, according to the CME FedWatch tool.

Rising tensions between the US and Iran might contribute to the US Dollar’s upside as a safe-haven asset. US President Donald Trump set a Tuesday deadline for Iran to reopen the Strait of Hormuz, threatening to hit the country’s power plants and bridges if it does not comply. Iran's foreign ministry spokesperson said that Tehran will reciprocate attacks on its infrastructure and target similar infrastructure owned by the US or related.

Traders brace for the US March ISM  Services Purchasing Managers Index (PMI) data later on Monday. If the report shows a weaker-than-expected 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

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.

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