United States Dollar Index holds in range amid ongoing hopes of a negotiated end to the war
- The US Dollar Index remains within previous ranges around 101.00 despite the fresh hostilities in Iran.
- Markets see these skirmishes as negotiating manoeuvres rather than a serious threat to the ceasefire.
- Traders are wary of placing large US Dollar positions, awaiting the release of the FOMC minutes.
The US Dollar Index (DXY) pulls back to levels a few pips shy of 101.00 during Wednesday’s European session, after being rejected at the 101.20 area earlier in the day, and has turned negative on daily charts. The Index rose amid the fresh hostilities in Iran but has remained within previous ranges as investors remain hopeful that the peace process will survive.
The US military announced earlier on Wednesday the completion of the latest round of attacks on Iran, hitting more than 80 targets, in retaliation for alleged attacks by Iranian forces on commercial vessels crossing the Strairtt of Hormuz earlier this week. The US has also rescinded the authorization to export Iranian Oil.
The Iranian Islamic Revolutionary Guard Corps (IRGC) said that they targeted 85 US military targets in Kuwait and Bahrain. The Bahrainian Interior Ministry confirmed sirens sounding in the country, while Kuwait’s Air Defense reported hostile missile and drone threats on the X social network.
Traders discard a full-blown US-Iran war
Markets, however, have shown a moderate response to this news. The US Dollar Index, which measures the value of the Greenback against six majors, edged up but has failed to break the weekly trading range, around 101.00 so far.
Investors see these skirmishes as a manoeuvre to gain leverage in the peace talks, but not really as a serious threat to the peace process. Markets have grown used to a great deal of back-and-forth between the rival countries since the ceasefire was announced in early April, and remain convinced that the resumption of an all-out war seems off the cards for now.
Traders are also wary of placing large US Dollar bets ahead of the release of the minutes of June’s Federal Reserve meeting. The Fed left interest rates on hold at the meeting, but the unexpectedly hawkish tone of Chairman Kevin Warsh at his first monetary policy meeting contributed to cement expectations that the central bank will hike rates at least once this 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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