US Dollar Index hovers around 98.00, five-week highs as Middle East tensions escalate
- US Dollar Index may regain ground as escalating Middle East tensions lift safe-haven demand.
- US-Israeli strikes killed Iran’s Supreme Leader Ayatollah Ali Khamenei, marking a major escalation in the Middle East.
- Israeli forces struck Hezbollah-held areas in Beirut after missiles were fired from Lebanon, prompting evacuation orders for nearby towns.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, depreciated after reaching five-week highs, hovering around 97.90 during the Asian hours on Monday. However, the downside in the Greenback may be limited as escalating Middle East tensions boost safe-haven demand.
The United States (US) and Israel launched coordinated strikes on Iran over the weekend, reportedly killing Iran’s Supreme Leader Ayatollah Ali Khamenei. Tehran responded with attacks on US assets in neighboring countries, including the United Arab Emirates (UAE), Bahrain, Kuwait, Qatar, Saudi Arabia, Jordan, Iraq, and Syria.
US President Donald Trump said hundreds of targets were struck, including Revolutionary Guard facilities, air defense systems, nine vessels, and naval infrastructure. Trump added that military operations will continue until objectives are achieved.
Israel also carried out heavy strikes on Beirut after Hezbollah fired missiles across the border early Monday, with the Israeli military issuing evacuation orders for several Lebanese towns.
On the policy front, Federal Reserve (Fed) Governor Mi Lan called for significant interest rate cuts as soon as possible, arguing that underlying price pressures remain subdued and that persistently high rates reflect distortions in inflation measurement.
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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