US Dollar Index steadies near 98.50 amid safe haven demand
- US Dollar Index appreciated as safe-haven demand increased due to the Middle East war.
- President Trump says the “big wave” of strikes against Iran is still to come in the ongoing conflict.
- ISM Manufacturing PMI eased to 52.4 in February from 52.6, beating 51.8 expectations.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, steadied after registering nearly 1% gains in the previous session, trading around 98.50 during the Asian hours on Tuesday. The Greenback appreciated as safe-haven demand increased due to the Middle East war.
US President Donald Trump said the “big wave” of strikes against Iran in the ongoing conflict is still to come. Marco Rubio stated that the United States (US) is preparing for a “major uptick” in attacks in Iran over the next 24 hours. The United States (US) and Israel hit thousands of targets inside Iran, continuing their joint campaign after they killed its supreme leader, Ayatollah Ali Khamenei.
A Reuters report cited Ebrahim Jabari, senior adviser to the commander-in-chief of the Islamic Revolutionary Guard Corps (IRGC), as saying: “The Strait of Hormuz is closed. If anyone tries to pass, the heroes of the Revolutionary Guards and the regular navy will set those ships ablaze.”
On the data front, the Institute for Supply Management (ISM) Manufacturing PMI slipped to 52.4 in February from 52.6 in January, but still beat expectations of 51.8. The Manufacturing Employment Index rose to 48.8 from 48.1, though it remained in contraction territory.
The US Dollar gained additional support on expectations that higher energy prices linked to the conflict will stoke inflation and lower the chances of near-term rate cuts by the Federal Reserve (Fed). At the same time, elevated energy costs and inflation risks pressured currencies of major energy-importing economies, particularly in Europe and Japan.
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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