US Dollar Index inches higher above 98.00 despite risk-on mood

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The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, halts its losing streak that began on April 6 and is trading around 98.20 during the European hours on Thursday.

US Dollar Index gains support as Strait of Hormuz uncertainty persists under a dual blockade.
The Greenback may weaken further as safe-haven demand fades amid rising expectations of de-escalation in the Middle East conflict.
Fed’s Hammack highlighted the issue of how high energy prices rise and how long they remain elevated.

The US Dollar (USD) receives some support as traders view the situation around the Strait of Hormuz as highly uncertain, with the waterway effectively restricted under a dual blockade. However, Tehran may allow vessels to transit via the Omani side if an agreement is reached to prevent renewed escalation in hostilities.

The Greenback may further depreciate on faded safe-haven demand amid growing expectations of a potential de-escalation in the Middle East conflict. US President Donald Trump stated that the war was “close to over.” A Bloomberg report highlighted speculation about a possible two-week extension of a ceasefire, although Trump downplayed the need for such a measure, pointing to ongoing negotiations aimed at ending the conflict.

Moreover, easing energy prices helped alleviate inflation concerns and reduced expectations of additional Federal Reserve (Fed) tightening. The Fed is broadly expected to keep interest rates unchanged this month and potentially through the remainder of the year.

Cleveland Fed President Beth Hammack said in a CNBC interview on Wednesday that the key issue to watch is how high energy prices climb and, more importantly, how long they stay elevated. Meanwhile, St. Louis Fed President Alberto Musalem noted that the oil shock driven by the Middle East conflict is likely feeding into core inflation, with expectations that it will remain close to 3% throughout the year.

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.