US Dollar Index holds near 100.00 on Iran war fears, Trump deadline
- US Dollar Index gains support on safe-haven demand amid uncertainty over Iran war peace talks.
- Traders await the outcome of Trump’s Iran deadline, set for 8:00 PM ET on Tuesday.
- Iran war boosts energy prices, heightens inflation fears, and reinforces hawkish Fed stance.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is holding ground after registering losses in the previous trading day and hovering around 100.00 during the European hours on Tuesday. The Greenback receives support on increased safe-haven demand amid peace talks uncertainty surrounding the Iran war.
US President Donald Trump warned that he could target Iranian power plants and bridges unless his demands are met by 8:00 PM Eastern Time on Tuesday. Trump said on Monday that the latest proposal for a US ceasefire with Iran is “not good enough" ahead of his deadline for Iran to either reopen the Strait of Hormuz. “It’s not good enough, but it’s a very significant step,” Trump said, adding, “They’re negotiating now, and they’ve made a very significant step. We’ll see what happens.”
The US Dollar receives support as the Iran war lifts energy prices, fueling inflation fears and prompting a more hawkish Federal Reserve stance. Markets have fully priced in that the Federal Reserve will hold the federal funds rate steady this month, with borrowing costs likely to remain unchanged through year-end.
CME Group’s FedWatch Tool indicates a 99.5% probability that the Fed will leave rates unchanged at the April meeting. Traders are now looking ahead to the latest Federal Open Market Committee (FOMC) Meeting Minutes for clearer guidance on the central bank’s policy trajectory.
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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