The U.S. Dollar Index (DXY), which measures the value of the U.S. dollar (USD) against six major currencies, remains stable after posting diminutive losses the previous day and was hovering around 99.10 in the Asian hour on Thursday.
The dollar is holding steady in the market as traders assess the economic impact of peace negotiations between the United States (US) and Iran, coupled with increased threats to the critical Strait of Hormuz shipping lane.
On Wednesday, a Bloomberg report indicated that US President Donald Trump described ongoing negotiations with Iran as being in their final stages. However, President Trump also reiterated a firm commitment to resume military action within days if Iran rejects his terms. In response, Iranian President Masoud Pezeshkian emphasized that Tehran has no intention of capitulating, stating on social media platform X that attempts to force a surrender through coercion are nothing more than an illusion.
The Federal Open Market Committee (FOMC) minutes from its April meeting were released on Wednesday, indicating a hawkish tone around the Fed’s outlook. Most Federal Reserve (Fed) officials have warned that the central bank will likely need to consider raising interest rates if inflation continues to remain above its 2% target. The minutes underscored Fed officials’ deepening concern about inflationary pressures from the war in Iran.
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 significant 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 rapid 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.
