US Dollar Index slips below 98.00 on Middle East de-escalation hopes
- US Dollar Index declines on improved sentiment amid expectations of Middle East de-escalation.
- A Bloomberg report highlighted speculation about a possible two-week extension of a ceasefire between the US and Iran.
- Easing energy prices reduced inflation concerns and lowered expectations of further Federal Reserve tightening.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is continuing its losing that began on April 6 and trading around 97.90 during the Asian hours on Thursday.
The US Dollar remains under pressure amid improved market sentiment, supported by expectations of a potential de-escalation in the Middle East conflict. US President Donald Trump stated that the war was “close to over.” A Bloomberg report highlighted speculation about a possible two-week extension of a ceasefire, although Trump downplayed the need for such a measure, pointing to ongoing negotiations aimed at ending the conflict.
The Strait of Hormuz remains effectively closed under a dual blockade. However, Tehran may allow vessels to pass freely through the Omani side of the Strait if an agreement is reached to avoid a renewed escalation in hostilities.
The Greenback faced further downside pressure from easing energy prices, which helped alleviate inflation concerns and reduced expectations of additional Federal Reserve (Fed) tightening. The Fed is broadly expected to keep interest rates unchanged this month and potentially through the remainder of the year.
Beth Hammack stated in a CNBC interview on Wednesday that the key factor to monitor is how high energy prices rise, and more importantly, how long they remain elevated. Meanwhile, Alberto Musalem said that the oil shock triggered by the Middle East conflict is likely feeding into core inflation, with expectations that it will remain near 3% throughout the year.
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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