US Dollar Index holds steady above 98.00 on heightened Middle East geopolitical tensions
- The US Dollar Index flat lines around 98.15 in Monday’s early European session.
- The Fed is expected to keep interest rates steady at its June meeting.
- Heightened geopolitical tensions in the Middle East could boost the US Dollar.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, trades on a flat note near 98.15 during the early European session on Monday. Traders prefer to wait on the sidelines ahead of the US Federal Reserve (Fed) interest rate decision on Wednesday. Also, the developments surrounding Middle East geopolitical tensions will be closely watched.
Based on the latest US inflation data, traders now see a nearly 80% possibility of a Fed rate cut in September, followed by another one in October, according to Reuters. Traders will take more cues from the FOMC Press Conference. "If the Fed delivers a dovish hold as we expect, the dollar is likely to resume weakening due to the worsening fundamental backdrop in the U.S.,” said Win Thin, global head of markets strategy at Brown Brothers Harriman.
US consumer sentiment improved for the first time in six months in June as trade tensions between the United States and China eased. The University of Michigan's Consumer Sentiment Index rose to 60.5 in June from a final reading of 52.2 in May, beating the estimation of 53.5. The upbeat US economic data could lift the Greenback in the near term.
The conflict between Israel and Iran has entered its fourth day, with both sides launching fresh missiles overnight despite world calls for negotiation and de-escalation. Any signs of escalating geopolitical tensions and risks into a broader regional conflict could boost the safe-haven flows, benefitting the USD.
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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