The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is remaining steady after registering modest losses in the previous day and hovering around 99.10 during the Asian hours on Thursday.
The Greenback holds ground as traders assess the economic implications of peace negotiations between the United States (US) and Iran, alongside heightened threats to the critical Strait of Hormuz shipping lane.
On Wednesday, a Bloomberg report indicated that US President Donald Trump characterized the ongoing negotiations with Iran as being in their final stages. However, President Trump also reiterated a firm pledge to resume military actions within days if Iran rejects his terms. In response, Iranian President Masoud Pezeshkian emphasized that Tehran has no intention of capitulating, stating on the social media platform X that attempting to force a surrender through coercion is nothing more than an illusion.
Federal Open Market Committee (FOMC) Minutes for the April meeting were released on Wednesday, indicating a hawkish tone surrounding the Fed outlook. The majority of Federal Reserve (Fed) officials warned the central bank would likely need to consider raising interest rates if inflation continued to run persistently above their 2% target. The minutes highlighted the deepening concern among Fed officials about inflationary pressures driven by the Iran war.
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.
