The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is falling after posting modest gains the previous day and was trading around 98.20 in Asian hours on Friday.
The dollar is weakening due to improved market sentiment resulting from the de-escalation of renewed tensions in the Middle East. Separate statements by Israel and Iran indicate that hostilities have subsided for now. US President Donald Trump also stated that the ceasefire between the US and Iran remains intact.
The US military carried out attacks on the Iranian port city of Bandar Abbas and the island of Qeshm in the Strait of Hormuz. A senior U.S. official told Fox News that the attacks do not represent a resumption of war and should not be interpreted as an end to any existing ceasefire agreement.
U.S. Central Command confirmed that Iranian forces launched missiles, drones and tiny boat attacks on the USS Truxtun, USS Rafael Peralta and USS Mason while three guided-missile destroyers were passing through the Strait of Hormuz. CENTCOM described the Iranian operation as unprovoked and said an official statement said U.S. forces responded under the right of self-defense.
Meanwhile, the Trump administration is awaiting Iran’s response to a proposal aimed at reopening the Strait of Hormuz and ending the nearly 10-week conflict, while tensions remain high in the Persian Gulf and Lebanon. Reports indicate that Tehran is expected to convey its response via Pakistan within the next two days.
Traders are also closely watching the upcoming April U.S. jobs report, which is expected to show nonfarm payrolls increased by 62,000 in April. jobs compared to 178 thousand in March, while the unemployment rate is expected to remain stable at 4.3%.
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 essential 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 speedy 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 up-to-date purchases. This is usually positive for the US dollar.
