Forex Today: US Dollar recovers modestly as markets assess developments in Mideast
Here is what you need to know on Tuesday, August 25:
The US Dollar (USD) stays resilient against its major rivals early Tuesday after posting small gains on Monday. Market participants await mid-tier data releases from the US, including the Conference Board's Consumer Confidence Index for August and July New Home Sales, while keeping a close eye on the headlines surrounding the crisis in the Middle East.
US Dollar Price This week
The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the strongest against the Canadian Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.12% | -0.07% | 0.32% | 0.35% | 0.22% | 0.27% | 0.22% | |
| EUR | -0.12% | -0.19% | 0.11% | 0.27% | 0.10% | 0.14% | 0.10% | |
| GBP | 0.07% | 0.19% | 0.22% | 0.47% | 0.31% | 0.33% | 0.31% | |
| JPY | -0.32% | -0.11% | -0.22% | 0.09% | -0.02% | 0.04% | -0.02% | |
| CAD | -0.35% | -0.27% | -0.47% | -0.09% | -0.09% | -0.06% | -0.13% | |
| AUD | -0.22% | -0.10% | -0.31% | 0.02% | 0.09% | 0.05% | 0.00% | |
| NZD | -0.27% | -0.14% | -0.33% | -0.04% | 0.06% | -0.05% | -0.04% | |
| CHF | -0.22% | -0.10% | -0.31% | 0.02% | 0.13% | -0.00% | 0.04% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
The US Treasury Department announced new sanctions on 60 individual, entities and vessels as part of its expanded effort to put economic pressure on Iran. Treasury Secretary Scott Bessent warned that if other countries do not sever business ties with Iran, they are under the risk of being forced out of the Dollar-based financial system. Bessent, however, declined to say which specific countries would be targeted or what type of penalties would be imposed. Meanwhile, Al Jazeera reported Pakistan’s interior minister saying that significant progress has been made during talks with Iran’s president to restore a previous Memorandum of Understanding with the US.
The USD Index clings to marginal gains above 99.00 in the Europena morning on Tuesday, while US stock index futures rise between 0.2% and 0.5%.
USD bears gain traction as positioning flips and options chase the move
According to TD Securities, the Dollar’s recent slide is being reinforced by more than just softer US data and the “gradual pricing out of Fed rate hike expectation.” The bank argues that “increased financial repression and US institutional credibility risks further cemented the bearish USD momentum,” suggesting the underlying trend has become more entrenched.
Strategists at the firm also highlight a notable shift in investor positioning, noting that “USD positioning has just flipped from long to short and has more room to grow.” They judge that “broad USD downtrends remain intact except in select pairs such as USDCAD,” underscoring that the move is not yet seen as exhausted. In options markets, TD points out that “front-end risk reversals broadly flipping toward USD puts vs G10 currencies amid rising implied vols suggest investors are chasing the USD lower,” reinforcing the view that bearish sentiment on the Dollar is spreading across the complex.
EUR/USD extends its downward correction and trades near 1.1650 in the European morning on Tuesday after losing about 0.15% on Monday. The European economic calendar will feature IFO - Current Assessment data for August.
GBP/USD remains in a consolidation phase above 1.3600 for the second consecutive day on Tuesday and move sideways in a narrow channel.
USD/JPY inches higher in the European session and closes in on 159.50.
AUD/USD struggles to keep its footing and trades marginally lower on the day below 0.7150 after cosing in negative territory on Monday. In the early trading hours of the Asian session on Wednesday, July Consumer Price Index (CPI) data from Australia will be watched closey by investors.
Gold (XAU/USD) advanced to its highest level since mid-May near $4,700 during the Asian trading hors on Tuesday but failed to preserve its bullish momentum. At the time of press, XAU/USD was trading in the red below $4,650.
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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