US Dollar gains momentum to near 99.50 amid Fed hawkish hold, Middle East tensions
- US Dollar Index strengthens to around 99.40 in Friday’s Asian session.
- The Fed left rates on hold at its March meeting on Wednesday, as expected.
- Rising tensions in the Middle East could boost the safe-haven currency, supporting 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 99.40 during the Asian trading hours on Friday. The DXY edges higher after a hawkish hold by the US Federal Reserve (Fed).
The US central bank kept interest rates unchanged in the 3.5%-3.75% range at the end of its two-day policy meeting on Wednesday, as widely expected. The Summary of Economic Projections (SEP), or so-called “dot plot," showed that officials maintained a median forecast for one rate cut in 2026.
During the press conference, Fed Chair Jerome Powell underscored the uncertainty surrounding the oil shock, adding that the US had not made as much progress on inflation as it had hoped.
Ongoing military tensions in the Middle East could boost a safe-haven currency such as the US Dollar. The US-Israeli war with Iran has entered its third week, with no sign of ending. Iranian Foreign Minister Abbas Araghchi vowed to show “ZERO restraint” if the country’s energy infrastructure were hit again, per Bloomberg. Saudi Foreign Minister Faisal bin Farhan Al Saud warned that the kingdom’s restraint isn’t "unlimited" and added it could take military action.
"The longer the war drags on, the higher the U.S. dollar will go, because it will benefit from safe-haven demand arising from higher uncertainty (and) also from the U.S. being an energy exporter," said Carol Kong, currency strategist at Commonwealth Bank of Australia.
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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