US Dollar Index attracts some buyers to near 98.00 as Middle East conflict fuels demand
- US Dollar Index gains momentum to around 98.00 in Monday’s early Asian session.
- Escalating conflict in the Middle East and hotter US PPI data support the US Dollar.
- A lack of clarity over US trade policy might cap the upside for the DXY.
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 98.00 during the early Asian trading hours on Monday. The DXY attracts some buyers as traders seek safe-haven assets amid escalating conflict in the Middle East.
The US Dollar received some support following military actions involving the US, Israel, and Iran over the weekend. Aerial strikes are ongoing across the Middle East, with Iranian missiles targeting Tel Aviv and Persian Gulf countries. Israel also continues to strike Iran. The action comes after weeks of warnings from Washington about Iran's nuclear weapons program and clashes between protesters and the country’s government.
Furthermore, hotter-than-expected US Producer Price Index (PPI) data might contribute to the Greenback’s upside. This report reinforces expectations that the US Federal Reserve (Fed) will maintain higher interest rates for longer.
However, US policy turbulence might cap the upside for the DXY. The US Supreme Court ruling on February 20 struck down US President Donald Trump's sweeping "reciprocal" tariffs. Trump responded by invoking Section 122 of the Trade Act of 1974 to impose a new global tariff regime.
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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