US Dollar Index weakens below 98.50 as Israel‑Iran ceasefire boosts risk appetite
- The US Dollar Index edges lower to around 98.25 in Tuesday’s Asian session.
- Trump announced a ceasefire between Israel and Iran, weighing on the US Dollar.
- Fed’s Bowman said Monday she would favor an interest rate cut at the next policy meeting in July so long as inflation pressures stay muted.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, loses ground to near 98.25 after US President Donald Trump announced the Israel-Iran ceasefire. Investors await Chair Powell’s semiannual testimonies and the US June Consumer Confidence report later on Tuesday for fresh impetus.
Trump said late Monday that a complete ceasefire between Israel and Iran will go into effect in order to end the conflict between the two nations. White House officials stated that Israel agreed to a ceasefire so long as Iran does not launch further attacks, while Iran has signaled to the US no further attacks will take place. The easing tension in the Middle East undermines safe-haven currencies like the US Dollar (USD).
Additionally, the dovish comments from the US Federal Reserve (Fed) policymakers contribute to the Greenback’s downside. Fed’s Vice Chair for Supervision Michelle Bowman noted on Monday that the US central bank should consider interest rate cuts soon, as risks to the job market may be on the rise. Last week, Fed Governor Christopher Waller said that the Fed is in a position to cut the policy rate as early as July.
On the other hand, the uncertainty surrounding the Israel and Iran ceasefire and any signs of renewed tensions could boost the safe-haven flows, supporting the US Dollar in the near term. The Israel Defense Forces (IDF) said early Tuesday that it had identified missiles launched from Iran toward southern Israel a short while ago.
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.
