United States Dollar Index eases as Iran halts military operations against Israel

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The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, edges lower on Monday as traders assess the evolving situation in the Middle East.

The US Dollar Index eases on Monday but remains near its highest level since early April.
Geopolitical uncertainty and higher-for-longer Fed bets continue to underpin the US Dollar.
Traders await US inflation data for fresh clues on the Fed's monetary policy path.

The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, edges lower on Monday as traders assess the evolving situation in the Middle East. At the time of writing, the index is trading around 99.95 after hitting 100.21 earlier in the day, its highest level since April 6.

The Greenback initially extended its recent rally as markets continued to digest Friday's stronger-than-expected US Nonfarm Payrolls (NFP) report, while renewed hostilities between Iran and Israel over the weekend further boosted demand for the safe-haven US Dollar.

However, the US Dollar reversed gains after Iran's Fars News Agency reported that Iran had ended its military operations against Israel.

The development kept hopes alive that a broader peace agreement in the Middle East remains possible. US President Donald Trump said negotiations with Tehran are still underway, though he warned that the US naval blockade of Iranian ports would remain in force until a final deal is reached.

Still, the situation remains fluid, limiting a deeper pullback in the US Dollar. At the same time, rising expectations of a hawkish Federal Reserve (Fed) continue to support the Greenback.

According to a report by Brown Brothers Harriman (BBH), "USD can continue to edge higher against most major currencies as the US macro backdrop of improving labor demand and sticky inflation backs a more restrictive Fed policy stance."

According to the CME FedWatch Tool, traders expect the Fed to keep interest rates unchanged over the coming months, while continuing to price in the possibility of a rate hike by year-end.

Traders will now turn their attention to US inflation data due later this week for fresh clues on the Fed's monetary policy outlook. Higher energy prices continue to push inflation higher, with the annual Consumer Price Index (CPI) forecast to rise to 4.2% in May from 3.8% a month earlier.

Meanwhile, the latest Survey of Consumer Expectations (SCE) released by the New York Fed on Monday indicated that longer-term inflation expectations remain well anchored. Inflation expectations were unchanged at 3.1% and 3.0% at the three-year and five-year-ahead horizons, respectively.

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.