US Dollar Index holds gains near 98.50 due to safe-haven demand
- US Dollar Index gains on safe-haven demand as stalled US–Iran peace talks dampen risk sentiment.
- Tehran signaled that it could end hostilities under conditions, but Trump rejected the proposal.
- The Federal Reserve is likely to keep the federal funds target range at 3.50%–3.75% on Wednesday.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is gaining ground after two days of losses and trading around 98.50 during the Asian hours on Tuesday.
The Greenback receives support from safe-haven demand amid stalled US-Iran peace talks. However, Iran offered to end its closure of the Strait of Hormuz if the US lifts its blockade on the country and ends the war in a proposal that would postpone discussions on the Islamic Republic’s nuclear program, per Bloomberg.
US President Donald Trump seems unlikely to accept the offer, and US Secretary of State Marco Rubio appeared to rule out any deal that excludes Iran’s nuclear program. Iranian sources added that Tehran avoided addressing its nuclear program until hostilities cease and Gulf shipping disputes are resolved.
The Federal Reserve (Fed) is widely expected to hold rates steady at Wednesday’s April meeting, which could be Jerome Powell’s final one as chair. The Fed is likely to maintain the federal funds target range at 3.50%–3.75%, marking a third straight hold. Fed nominee Kevin Warsh has stressed policy independence, even as markets price in a more aggressive rate-cutting path ahead.
The Wall Street Journal reported on Monday that US Treasury Secretary Scott Bessent warned that the United States (US) will place sanctions on anyone conducting business with sanctioned Iranian airlines as commercial flights resume from Tehran.
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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