US Dollar Index retraces to near 98.60 as Trump reassesses decision to strike Iran
- The US Dollar corrects as US President Trump has no plans to strike Iran immediately.
- The Fed sees fewer interest rate cuts in 2026 and 2027 than it anticipated previously.
- US housing demand slows down amid higher mortgage rates and Trump policy uncertainty.
The US Dollar (USD) retraces from its weekly high as comments from the White House that it will decide on its plans of striking Iran in the next two weeks have provided interim relief to investors.
On Thursday, Press Secretary Karoline Leavitt said, “Based on the fact that there is a substantial chance that negotiations may or may not take place with Iran in the near future, I will make my decision whether or not to go, within the next two weeks,” ANI News reported.
The development has come in as negative for safe-haven assets, such as the US Dollar, which performed strongly after a report from Bloomberg on Wednesday showed that senior US officials are preparing for the possibility of a strike on Iran as soon as the weekend.
During the European trading session on Friday, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, corrects to near 98.60 from the weekly high of 99.15 posted on Thursday.
Meanwhile, the downside in the US Dollar is expected to remain limited as the Federal Reserve (Fed) has anticipated a higher interest rate target for the next two years in its monetary policy announcement on Wednesday and warns of significant upside inflation risks.
The Fed’s dot plot showed on Wednesday that policymakers have revised the interest rate target higher to 3.6% and 3.4% for 20267 and 2027, respectively.
On the economic front, US housing demand has shown signs of slowing down due to higher mortgage rates and uncertainty surrounding new economic policies announced by President Donald Trump. The Housing Starts data showed on Wednesday showed that new single-family houses constructed in May were 1.256 million on month, significantly lower than expectations of 1.360 million and the prior release of 1.392 million.
Weak housing demand from individuals has dented the sentiment of homebuilders, forcing them to cut prices to attract buyers, Reuters reported. This week, the National Association of Home Builders showed that the Housing Market Index fell to 32 in June. This is the lowest reading seen since December 2022.
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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