US Dollar Index edges lower below 100.00 as traders brace for US PCE inflation release
- US Dollar Index softens to around 99.70 in Friday’s Asian session.
- Escalating geopolitical tensions in the Middle East could boost the safe-haven flows, supporting the DXY.
- The US PCE inflation report for January will be the highlight later on Friday.
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 99.70 during the Asian trading hours on Friday. The DXY trades in negative territory on the day but is poised for its second consecutive weekly gain and marks the highest levels since November 2025, bolstered by escalating geopolitical tensions in the Middle East.
The Pentagon and National Security Council (NSC) stated that they underestimated Iran’s willingness to close the Strait of Hormuz in response to US military strikes while planning the ongoing operation.
Iran’s new supreme leader, Mojtaba Khamenei, stated that the crucial Strait of Hormuz should remain closed and Tehran will continue attacks on its Persian Gulf neighbors. Ongoing hostilities in the Middle East, specifically involving the US, Israel, and Iran, could provide some support to the US Dollar against its rivals.
Expectations for the US Federal Reserve (Fed) rate cuts have been reduced as oil-driven inflation complicates the US policy path. Traders will take more cues from the US Personal Consumption Expenditures (PCE) Price Index report for January, which is due on Friday.
The headline PCE is expected to see an increase of 2.9% YoY in January, while the core PCE is projected to see a rise of 3.1% during the same period. In case of softer-than-expected inflation outcomes, this could weigh on the Greenback in the near term.
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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