US Dollar Index flat lines above 98.00 on fragile Middle East ceasefire
- US Dollar Index holds steady around 98.25 in Friday’s Asian session.
- Trump expresses optimism about a peace deal with Iran.
- Markets expect the rates to remain unchanged this year.
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 98.25 during the Asian trading hours on Friday. The DXY trades on a flat note amid uncertainty surrounding a ceasefire between Israel and Lebanon. Traders await the prospects for fresh US-Iran talks this weekend for fresh impetus.
A 10-day ceasefire between Lebanon and Israel went into effect on Thursday. The uncertainty in the Middle East remains high and could boost a safe-haven currency such as the US Dollar. The Lebanese army claimed on Friday that Israel had committed violations of the ceasefire in Lebanon, including intermittent shelling of several southern Lebanese villages.
On the other hand, US-Iran ceasefire optimism could weigh on the Greenback. A two-week peace deal between the two countries is currently in effect but is due to expire next week. US President Donald Trump said the next meeting between Washington and Tehran could take place over the weekend.
"The markets are in a bit of a consolidation phase because they have already priced in some optimism about the ceasefire being extended earlier in the week," said Sim Moh Siong, FX strategist at OCBC. "You will need the next catalyst to provide a more directional move. It's no longer a one-way street for the dollar from here."
Traders will take more cues about how US Federal Reserve (Fed) officials will tackle war-induced inflation pressures. Fed funds futures showed markets continue to bet that the US central bank will keep rates on hold this year, according to Reuters.
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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