US Dollar Index Price Forecast: Trades with caution near 20-day EMA on US-Iran deal optimism
- The US Dollar Index trades close to Thursday’s low at around 99.00 amid US-Iran deal optimism.
- Investors await the US President Trump’s approval to the deal with Iran.
- The Fed is unlikely to cut interest rates this year.
The US Dollar (USD) trades cautiously as the appeal of safe-haven assets has diminished due to renewed optimism over the United States (US)-Iran deal.
As of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, is flat at around 99.00. The DXY corrected sharply from its over seven-week high of 99.10 on Thursday, following media reports that the US and Iran have reached a 60-day Memorandum of Understanding (MoU), which still needs the approval from US President Donald Trump.
The DXY came under pressure as renewed US-Iran deal hopes weighed heavily on oil prices. The US Dollar had been outperforming since the start of the Middle East war, as elevated energy prices boosted the US inflation, which forced traders to price out the possibility of interest rate cuts this year.
The CME FedWatch tool shows that the possibility of the Fed holding interest rates steady at their current levels by the year-end is 52.9%, while the rest favor at least one interest rate hike. This is a sharp turnaround from two interest rate cuts anticipated before the war started.
Going forward, investors will focus on the US ISM Manufacturing and Services PMI and the Nonfarm Payrolls (NFP) data for May, which will be released next week.
US Dollar Index technical analysis
The Dollar Index Spot trades almost flat at around 99.00 at press time. The spot has remained confined in a tight range between 98.84 and 99.54 for the last two weeks. The index holds a mild bullish near-term bias as it stays above the 20-day Exponential Moving Average (EMA) at 98.91 and well over the former uptrend-line break area around 98.15.
The Relative Strength Index (RSI) at 52.71 hovers just above the neutral band, suggesting a modest positive tone rather than strong directional conviction.
On the downside, initial support is seen at the 20-day EMA at 98.91, with a deeper cushion emerging near the broken support trend line around 98.15. As long as price holds above these layers, pullbacks are likely to be treated as corrective within the broader recovery structure, while a sustained break above the March 28 high at 99.54 would lead to further upside towards 100.00.
(The technical analysis of this story was written with the help of an AI tool.)
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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