United States Dollar Index trims gains after Axios reports preliminary US-Iran truce deal
- The US Dollar Index eases from seven-week highs as traders react to fresh US-Iran headlines.
- Axios reports Washington and Tehran reached a preliminary 60-day truce agreement.
- Fed’s Musalem says inflation could take longer to return to target and warns rate hikes remain possible.
The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, trims earlier gains on Thursday as traders react to fresh geopolitical headlines surrounding US-Iran negotiations. At the time of writing, the index is trading around 99 after hitting a seven-week high near 99.54 earlier in the day.
The US Dollar initially strengthened on Thursday amid renewed attacks between the US and Iran, boosting safe-haven demand for the Greenback. However, risk sentiment improved after Axios reported that the US and Iran had reached a preliminary 60-day agreement to extend the current truce, though the deal still awaits final approval from US President Donald Trump. Trump asked for a few days to consider the final deal before making a decision.
Still, uncertainty remains high as both sides have previously failed to reach a final agreement amid differences over Iran’s nuclear program, sanctions relief and control of the Strait of Hormuz. Earlier this week, Iran’s Tasnim News Agency reported that the release of frozen Iranian assets remains part of any potential deal.
On the data front, softer-than-expected US inflation figures also weighed on the Greenback. The core Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s (Fed) preferred inflation measure, rose 0.2% MoM in April after increasing 0.3% in March. The yearly reading edged up to 3.3% from 3.2%, matching market expectations.
Despite the softer inflation data, it remains well above the Fed's 2% target. Meanwhile, elevated oil prices continue to keep inflation risks in focus, reinforcing expectations that the US central bank may need to keep interest rates higher for longer.
St. Louis Fed President Alberto Musalem said on Thursday his baseline outlook is that inflation will “take longer to come back down to target.” He added that “there is a scenario where the economy might require a rate increase” and warned that “if we don't see disinflation in the next 1-2 quarters, that would concern me.” Musalem also said, “There is also a scenario that in 2H of the year we could see a growth slowdown.”
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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