The U.S. Dollar Index (DXY) fell to 98.50 on Tuesday, rebounding from last week’s highs as demand for safe-haven currencies weakened following comments from President Trump suggesting the Iran war was coming to an end.
The session told a story of conflicting narratives. On the one hand, US President Donald Trump reiterated that the war was “basically over” and oil prices fell by about 10% after the International Energy Agency (IEA) convened an emergency meeting on the release of strategic oil reserves. On the other hand, Defense Secretary Pete Hegseth said Tuesday would be the U.S. military’s “most intense day of strikes of the entire campaign,” based on reports of weighty bombing of Kish Island off Iran’s southern coast. Adding to the confusion, Energy Secretary Chris Wright posted on social media that the U.S. Navy had successfully escorted a tanker through the Strait of Hormuz, then deleted the post. Reuters subsequently confirmed the retraction. The episode raised recent questions about whether escort operations were actually underway and cast doubt on the credibility of the administration’s assurances that oil flowing through the critical bottleneck would be restored.
Key US inflation data just around the corner
The coming week will be full of vital data from the US that will shape the next movement of the dollar. The main event will be Wednesday’s report on the Consumer Price Index (CPI) for February at 12:30 GMT, with core CPI forecast at 0.3% month-on-month and 2.4% year-on-year, and core CPI forecast at 0.2% month-on-month. The data was collected before the start of the Iran war, so it won’t reflect the energy price shock, but any upward surprise would strengthen the Fed’s hawkish stance. Thursday brings the first applications for unemployment benefits (consensus 215,000) and Fed Governor Bowman’s speech at 19:00 GMT. A jam-packed Friday with preliminary fourth-quarter gross domestic product (GDP), January headline personal consumption expenditures (PCE) at 12:30 GMT, as well as the University of Michigan (UoM) Consumer Sentiment Index and JOLTS Job Opportunities and Turnover Survey (JOLTS) data later in the session.
Big picture
The main causative factor remains the conflict in Iran. If geopolitical risks rise again or oil prices reverse higher, the dollar’s protected haven offer could quickly return. However, if the conflict ends as Trump suggests, DXY will be at risk of further deterioration as the war bonus expires and expectations for interest rate cuts recalibrate. The next catalyst will be Wednesday’s CPI.
DXY daily chart
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 brisk 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 recent purchases. This is usually positive for the US dollar.
