US Dollar Index holds gains near 98.50 due to renewed Middle East tensions
- US Dollar Index holds firm due to the strengthening Fed's “higher-for-longer” policy stance amid persistent inflation.
- Fed’s Waller warns prolonged Middle East conflict raises inflation and employment risks.
- The US Dollar gains support from safe-haven demand amid escalating US–Iran tensions.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is experiencing volatility and holding gains around 98.30 during the Asian hours on Monday.
The DXY maintains its position against its major peers as markets price in a Federal Reserve (Fed) “higher-for-longer” stance, driven by persistent inflation concerns and Middle East tensions. Traders will likely observe Tuesday’s US Retail Sales data, which is expected to rise 1.3% month-on-month (MoM) in March after 0.6% in February.
Fed member Christopher Waller said on Friday that the break-even rate for the job market is currently likely around zero. As the longer Middle East war remains unresolved, inflation and job risks increase, Waller added. Meanwhile, San Francisco Fed President Mary Daly indicated that, at this point, she is observing whether higher oil prices are affecting the prices of other goods and services.
The Greenback also draws support from heightened safe-haven demand amid re-escalating United States (US)–Iran tensions. The Guardian reported on Monday that Iran’s Foreign Ministry spokesman Esmail Baghaei said the US blockade of Iran’s ports and coastline is an act of aggression that violates the ceasefire. Baghaei posted on social media, "By deliberately inflicting collective punishment on the Iranian population, it amounts to a war crime and crimes against humanity.”
Iranian authorities had briefly indicated on Friday that the Strait would reopen, but reversed the move on Saturday after US President Donald Trump refused to lift the blockade on Iranian ports. Iran’s military stated that the US breached the ceasefire by firing on one of Iran’s commercial vessels and warned it would soon retaliate against it.
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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