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 99.65 during the early European trading hours on Monday. The DXY gains momentum amid escalating geopolitical tensions in the Middle East and a hawkish hold from the US Federal Reserve (Fed).
Iranian President Masoud Pezeshkian said “threats and terror” were strengthening Iranian unity after US President Donald Trump on Sunday warned he would “obliterate” Iranian power plants if the Strait of Hormuz was not opened within 48 hours.
Additionally, the Iranian military stated that it will completely shut the strait if Trump proceeds with his threats to target Iranian energy facilities. Signs of rising tensions and a prolonged conflict between the US and Iran could boost a safe-haven currency such as the US Dollar against its rivals.
Surging crude oil and energy prices, driven by the escalating US-Israeli war with Iran, reignite inflation fears and prompt the Fed to turn hawkish. This, in turn, contributes to the DXY’s upside.
“If markets price a U.S. tightening cycle, the USD will lift strongly against all currencies in our view,” said Joseph Capurso, head of international economics at the Commonwealth Bank of Australia.
Traders will keep an eye on the preliminary reading of the US S&P Global Manufacturing Purchasing Managers Index (PMI) for March, which is due on Tuesday. If the reports show weaker-than-expected outcomes, this could drag the DXY lower in the near term.
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.
Source: https://www.fxstreet.com/news/us-dollar-index-edges-higher-above-9950-on-middle-east-tensions-hawkish-fed-202603230408
