The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is recovering from recent losses from the previous trading day and is hovering around 100.80 during Asian hours on Monday.
The dollar is gaining support amid renewed concerns about the U.S.-Iran peace deal, leaving investors concerned about both the risk of inflation and the prospect of continued high interest rates.
According to a CNBC report on Sunday, US President Donald Trump has threatened direct attacks on Iran if Hezbollah continues attacks on Israel. This warning severely clouded the prospects for diplomatic progress between Washington and Tehran, completely dismantling the current peace framework, even though Vice President J.D. Vance met with Iranian officials during the first round of talks under the interim agreement.
Meanwhile, Tehran simultaneously announced that it had once again closed the strategic Strait of Hormuz. Although Iranian state media reported that Tehran had completely suspended negotiations in response to Trump’s remarks, sources close to the matter indicate that discussions are taking place quietly.
The Federal Reserve (Fed) kept interest rates unchanged last week, but adopted a decidedly hawkish tone. It is worth noting that 9 of 19 Fed policymakers currently predict at least one interest rate escalate this year, and market investors are pricing in a potential escalate as early as September.
“The resurgent U.S. dollar, fueled by the Fed’s new hawkish tone under Kevin Warsh, has attracted attention,” noted Tim Waterer, chief market analyst at KCM Trade, highlighting the growing headwinds for precious metals.
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 crucial 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 fresh purchases. This is usually positive for the US dollar.
