101: United States Dollar Index remains close to 13-month highs
- US Dollar Index remains close to a 13-month high of 101.13.
- The Greenback receives support from a hawkish sentiment surrounding the Fed policy outlook.
- US Vice President JD Vance noted that negotiations have made "great progress," despite some underlying friction.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, remains steady after registering modest gains in the previous day and is hovering around 101.00 during the Asian hours on Tuesday.
The US Dollar Index remains near a 13-month high of 101.13, reached on June 19, amid a hawkish sentiment surrounding the Federal Reserve (Fed) policy outlook. The US Fed opted to hold its benchmark interest rate steady between 3.50% and 3.75% in June.
However, the updated economic projections and commentary from Kevin Warsh, presiding over his first meeting as Fed Chair, surprised the market by leaning more hawkish than anticipated. As a result, futures traders have fully priced in a 25-basis-point rate hike for the September meeting, with some pricing in a minor probability of a tightening move as early as next month.
The Greenback may face challenges amid easing risk aversion attributed to the ongoing peace talks between the US and Iran, which helped ease concerns about inflation. CNBC reported on Tuesday that US Vice President JD Vance noted that negotiations have made "great progress," despite some underlying friction.
On Monday, Vice President Vance announced that Iran has agreed to readmit International Atomic Energy Agency (IAEA) inspectors. The optimism was mirrored by Iranian Foreign Minister Abbas Araghchi, who similarly confirmed that the Swiss dialogue has yielded "major progress."
US Dollar FAQs
The US 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 is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD 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 went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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