The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is paring its recent gains recorded in the previous session and is trading around 97.70 during Asian hours on Friday.
Traders will now look to U.S. Producer Price Index (PPI) data released in January for guidance on Federal Reserve (Fed) policy later in the day. The report is forecast to show wholesale inflation slowing to 0.3% on a monthly basis, down from 0.5% in December.
The dollar is struggling with continuing uncertainty about US trade policy. Trump announced plans to impose across-the-board 15% tariffs on imports after a Supreme Court ruling struck down his earlier reciprocal tariff regime. Meanwhile, U.S. Trade Representative Jamieson Greer said tariffs for several countries could be raised to 15% or more in the coming days.
The US dollar may gain in value due to safe-haven demand amid continued geopolitical tensions after Iran said it would not allow enriched uranium to leave the country. A significant U.S. military presence in the Middle East has kept markets cautious, and President Donald Trump has warned of possible military action if no agreement is reached.
Iranian Foreign Minister Abbas Araqchi described Thursday’s talks as the most substantive yet, outlining Tehran’s demands for sanctions relief and a framework for lifting restrictions. However, a source familiar with the U.S. position said American officials were dissatisfied. Negotiations will resume after consultations in both capitals, with meetings at technical level scheduled in Vienna next week.
US Dollar FAQs
The United States 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 circulates alongside local banknotes. As of 2022, it is the most popular currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions daily. After World War II, the US dollar 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 was abolished.
The single most vital factor influencing the value of the US dollar is the monetary policy set by the Federal Reserve (Fed). The Fed has two missions: achieving price stability (controlling inflation) and promoting full employment. The basic tool for achieving these two goals is the adjustment of interest rates. When prices rise too swift and inflation exceeds the Fed’s 2% target, the Fed will raise interest rates, which will improve the value of the USD. When inflation falls below 2% or the unemployment rate becomes too high, the Fed may lower interest rates, which will negatively impact the dollar.
In extreme situations, the Federal Reserve can also print more dollars and implement quantitative easing (QE). QE is the process by which the Fed significantly increases the flow of credit in the gridlocked financial system. This is an unusual policy measure used when credit runs out because banks will not lend to each other (for fear of default by the counterparty). This is a last resort when lowering interest rates alone does not bring the required result. This was the Fed’s weapon of choice in the fight against the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more dollars and using them to buy U.S. government bonds, mostly from financial institutions. QE usually leads to a weakening of the US dollar.
Quantitative Tightening (QT) is the reverse process in which the Federal Reserve suspends bond purchases from financial institutions and does not reinvest the principal amount of maturing bonds in novel purchases. This is usually positive for the US dollar.
