United States Dollar Index declines despite increased safe-haven demand

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The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is holding losses after registering minor gains in the previous day and trading around 100.00 during the Asian hours on Thursday.

US Dollar Index fell as Middle East uncertainty grew after US-Iran retaliatory strikes disrupted regional stability following a helicopter downing.
Trump threatened to strike Iran "very hard," accusing Tehran of intentionally stalling interim peace deal negotiations.
May’s US CPI hit forecasts at 4.2% YoY, up from April’s 3.8%. Core CPI ticked up to 2.9%.

The Greenback struggles as traders assess the uncertainty surrounding the Middle East conflict. Following an incident where an American helicopter was shot down, the US launched "self-defense" strikes, triggering Iranian retaliatory attacks on US military facilities in Bahrain, Jordan, and Kuwait.

In response to what it termed "unwarranted and continued aggression," US Central Command (CENTCOM) confirmed that the US began airstrikes in Iran on Wednesday. Furthermore, President Donald Trump warned of severe military action if an interim peace deal is not finalized, accusing Tehran of stalling. Iranian officials, however, maintain they will not back down.

Adding to the crisis, the Islamic Revolutionary Guard Corps (IRGC) announced an immediate, total closure of the Strait of Hormuz to all commercial and oil vessels, warning that any transit attempts would be targeted. This disruption has sent oil prices surging, reviving inflation fears and altering Federal Reserve (Fed) interest rate expectations. Money markets are now pricing in 25 basis points of tightening, pointing toward a potential Fed rate hike by year-end.

On the economic front, May’s US CPI matched forecasts, rising to 4.2% YoY (up from 3.8% in April), while Core CPI ticked up to 2.9% YoY from 2.8%. Market attention now shifts to the upcoming release of the May Producer Price Index (PPI) and Initial Jobless Claims later today.

US Dollar FAQs

What is the US Dollar?

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.

How do the decisions of the Federal Reserve impact the US Dollar?

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.

What is Quantitative Easing and how does it influence the US Dollar?

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.

What is Quantitative Tightening and how does it influence the 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.