US Dollar Index moves above 99.00 due to Fed Rate hold, escalating Middle-East tensions
- US Dollar Index appreciates amid the ongoing Israel-Iran conflict.
- The Federal Reserve announced to keep the policy rate unchanged at the 4.25%–4.50% range in June.
- Fed Chair Powell signaled that inflation could rise in the upcoming months.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is extending its gains for the third successive session and trading higher at around 99.10 during the Asian hours on Thursday. The Greenback continues to gain ground following the US Federal Reserve’s (Fed) decision to keep the policy rate unchanged at the 4.25%–4.50% range at its June meeting on Wednesday, as widely expected. The Federal Open Market Committee (FOMC) still sees around 50 basis points of interest rate cuts through the end of 2025.
Fed Chair Jerome Powell signaled, in a post-meeting press conference, that inflation remains somewhat above goal and could rise in the future, citing the impact of US President Donald Trump’s tariffs. Powell supported the current policy stance that leaves the central bank well-positioned. He warned that ongoing policy uncertainty will keep the Fed in a rate-hold stance, and any rate cuts will be contingent on further improvement in labor and inflation data.
The US Dollar also draws support from heightened safe-haven demand amid ongoing Middle East tensions. Bloomberg, citing unnamed sources, reported that “US officials prepare for possible Iran strike in coming days.” “The US plans for any Iran attack continue to evolve.” Moreover, the Wall Street Journal, referencing individuals familiar with discussions, stated that US President Trump said late Tuesday that he approved of attack plans for Iran, but held it to see if Tehran would abandon its nuclear program.
President Trump criticized Iran “made a mistake”, responding to the Supreme Leader Ayatollah Ali Khamenei’s declaration that “the Iranian nation will not surrender” and warned of “irreparable damage” if the United States (US) directly joins the Israel-Iran conflict.
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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