US Dollar Index (DXY) pushes against 99.44 highs amid growing geopolitical risks
- The US Dollar Index holds right below six-week highs at 99.44 following Tuesday's rebound.
- Uncertainty about Iran's war and concerns about the blockade of Hormuz are supporting the safe-haven USD.
- Later on Wednesday, the minutes of April's Fed meeting might provide some distraction from geopolitics.
The US Dollar (USD) keeps marching higher on Wednesday, favoured by its safe-haven status, as the uncertain situation in Iran and high Oil prices keep risk appetite subdued. The US Dollar Index (DXY), which measures the value of the US Dollar against a basket of major currency peers, is trading a few pips below six-week highs at 99.44.
The DXY found sellers at a previous resistance zone, in the 99.00 area on Tuesday, and bounced up again, as investors gave up hopes of a swift end to Iran’s war. US President Donald Trump said on Tuesday that the US may need to attack Iran again, but that Tehran wants a deal to end a conflict that is nearing its third month.
Meanwhile, the Strait of Hormuz, a key passage for Oil and other key products such as gas or fertilisers, remains effectively closed, boosting energy prices and threatening a global food crisis. The energy shock has also triggered a global bond rout, as central banks are pressured to tighten their monetary policies to tame inflation, which is feeding a global rush for safety.
On the macroeconomic data front, the focus on Wednesday will be on the release of the minutes of the Federal Reserve’s (Fed) April meeting, which are expected to highlight a hawkish tilt, although the committee showed a wide divergence. The committee agreed to leave rates on hold at the meeting, but one member voted for a rate cut, and three called for removing the “easing bias” expression from the bank’s statement.
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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