US Dollar Index slips to near 98.00 as renewed US-Iran tensions de-escalate

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The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is inching lower after registering modest gains in the previous day and trading around 98.20 during the Asian hours on Friday.

US Dollar Index weakens as easing Middle East tensions improve overall market sentiment.
Israel and Iran signaled easing hostilities, while Trump said the US-Iran ceasefire remains in place.
US Nonfarm Payrolls are expected to rise by 62K in April, following a 178K increase in March.

The Greenback softens amid improving market sentiment driven by the de-escalation of renewed tensions in the Middle East. Separate statements from Israel and Iran suggested that hostilities have, for the time being, subsided. US President Donald Trump also stated that the ceasefire between the US and Iran remains intact.

The US military launched strikes on the Iranian port city of Bandar Abbas and Qeshm Island in the Strait of Hormuz. A senior US official told Fox News that the attacks do not signal a resumption of the war and should not be interpreted as the end of any existing ceasefire agreement.

US Central Command confirmed that Iranian forces launched missiles, drones, and small-boat assaults against USS Truxtun, USS Rafael Peralta, and USS Mason while the three guided-missile destroyers were transiting the Strait of Hormuz. CENTCOM described the Iranian operation as unprovoked and stated that US forces responded under the right to self-defense, according to the official statement.

Meanwhile, the Trump administration is awaiting Iran’s response to a proposal intended to reopen the Strait of Hormuz and bring an end to the nearly 10-week conflict, while tensions continue to remain high across both the Persian Gulf and Lebanon. Reports indicate that Tehran is expected to communicate its response through Pakistan within the next two days.

Traders are also closely watching the upcoming April US employment report, which is forecast to show Nonfarm Payrolls increased by 62K jobs in April, compared with 178K in March, while the Unemployment Rate is expected to hold steady at 4.3%.

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.