US Dollar Index declines below 98.50 as Iran offers US deal to reopen Strait of Hormuz
- US Dollar Index trades with mild losses around 98.45 in Monday’s early Asian session.
- Iran offered the US a proposal for reopening the Strait of Hormuz.
- The Fed interest rate decision will take center stage later 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 98.45 during the Asian trading hours on Monday. The DXY edges lower after reports that Iran offered the US a proposal for reopening the Strait of Hormuz.
Bloomberg reported on Monday that Iran gave the US a new proposal to reopen the Strait of Hormuz and end the war, which includes putting off nuclear negotiations. The plan called for extending the ceasefire so both countries can work toward a permanent end to the fighting. Any hopes for the US-Iran ceasefire and easing tensions in the Middle East could drag the US Dollar lower against its rivals.
On Sunday, US President Donald Trump told Jared Kushner and Steve Witkoff to skip the trip to Pakistan, which is mediating talks, saying that Iran “offered a lot, but not enough.”
All eyes will be on the Fed interest rate decision on Wednesday. The US central bank is expected to keep the federal funds rate between 3.50% and 3.75%, where it has sat since January. Deutsche Bank analysts noted that a repricing of Fed policy toward a more hawkish stance, driven by persistent oil-related inflation, could boost the DXY.
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.
Recommended Articles
