US Dollar Index softens to near 99.00 as Trump agrees to two-week ceasefire, FOMC Minutes loom
- US Dollar Index softens to around 99.05 in Wednesday’s early Asian session.
- Trump agreed to suspend attacks on Iran for two weeks in exchange for
- Tehran allowing safe passage through the Strait of Hormuz.
The FOMC Minutes will take center stage on Wednesday.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, currently trades near 99.05 during the Asian trading hours on Wednesday. The DXY tumbles after US President Donald Trump agrees to a two-week ceasefire after threatening massive attacks.
Trump said late Tuesday that he had agreed "to suspend the bombing and attack of Iran for a period of two weeks” on the condition that Iran reopens the Strait of Hormuz. Meanwhile, Iran’s Foreign Minister Abbas Araghchi said safe passage through the key waterway will be possible for a period of two weeks via coordination with Iranian armed forces.
Traders will closely monitor the developments surrounding the ceasefire. The US and Iran will meet in Islamabad, Pakistan, on Friday to finalize details. Any signs of easing tensions could weigh on the US Dollar as a safe-haven asset.
The Federal Open Market Committee (FOMC) Minutes will be in the spotlight later on Wednesday. The report could offer more cues on officials' views on the recent energy shock caused by conflicts in the Middle East.
Any hawkish remarks from Federal Reserve (Fed) officials could support the USD against its rivals in the near term. Meanwhile, overnight-indexed swaps signaled an about-40% probability of a Fed rate cut by the year-end, according to the CME FedWatch tool.
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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