US Dollar Index remains above 100.00 after pulling back from nearly 10-month highs

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The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, retreats after touching a near 10-month high of 100.54 in the previous session, trading around 100.20 during Asian hours on Monday.

US Dollar Index retreats after touching a near 10-month high of 100.54 in the previous session.
The Greenback weakens as risk aversion eases after reports the Iran war could end within weeks.
WTI may further advance as Middle East tensions rise after US forces reportedly targeted Iranian military sites on Kharg Island.

The Greenback weakens as risk aversion eases after a report from The Guardian indicated that US Energy Secretary Chris Wright expects the US-Israel conflict with Iran to end within “the next few weeks,” potentially allowing oil supplies to recover and energy prices to decline.

West Texas Intermediate (WTI) crude oil price fell after opening with a gap higher, trading near $96.30 per barrel at the time of writing. However, crude prices could regain momentum as Middle East tensions intensify after US forces reportedly targeted every military site on Kharg Island over the weekend, a hub that handles nearly 90% of Iran’s oil exports. While US President Donald Trump said oil infrastructure was not struck, Iran has warned it could retaliate against any US-linked oil facilities in the region.

President Trump also called on allied nations, including the UK, France, China, and Japan, to assist in securing the Strait of Hormuz, with reports suggesting a potential White House announcement in the coming days. Meanwhile, European Union (EU) foreign ministers are meeting in Brussels to discuss a possible naval response to the effective closure of the Strait. Some officials have proposed expanding the existing maritime mission toward the Strait of Hormuz, though ministers are unlikely to approve a deployment immediately.

Traders’ attention now turns to the US Federal Reserve policy meeting due on Wednesday. While no change to the federal funds rate is expected, investors will closely monitor policymakers’ guidance for the remainder of the year, particularly regarding inflation risks stemming from the recent surge in energy prices.

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.