United States Dollar Index remains below 99.00 as 10-year US yield steadies
- Long-end bond buyback plans could push Treasury yields and the US Dollar lower.
- Surging oil prices and Iran sanctions could restore safe-haven demand for the Greenback.
- Maximum economic pressure on Tehran aims to prevent large-scale military escalation in the Gulf.
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 98.80 during the early European hours on Friday.
The Greenback has drawn lower alongside a steady 10-year US Treasury yield at 4.7% as markets react to Washington's efforts to curb elevated yields through a long-end bond buyback program. However, US Treasury yields recovered Wednesday’s losses on Thursday despite comments from Treasury Secretary Scott Bessent indicating that accelerated debt buybacks could surpass the planned $4 billion per issue. Bessent also noted that an upcoming fiscal plan is currently in development, with the US budget deficit expected to have peaked under President Trump.
Meanwhile, safe-haven demand for the US Dollar could revive as oil prices surge due to diplomatic deadlocks in the Gulf, reinforcing ongoing inflation concerns and Federal Reserve rate hike bets. Tensions mounted as Washington prepared an "economic D-day" initiative aimed at severely restricting Iran's economy. Set to be formally announced on Monday, these proposed US measures target banks, shipping registries, cash transfers, and smuggling networks to cut Tehran off from global markets and compel it to negotiate on nuclear and regional issues.
According to a CNBC report, Treasury Secretary Scott Bessent noted that the administration's campaign to dismantle Iran's economic lifelines will likely eliminate the need for significant military intervention. He stated that applying maximum economic pressure makes a large-scale kinetic escalation far less probable.
US yields climb again as Treasury buyback boost fades
OCBC’s Sim Moh Siong cautions that the recent rally in US rates has proved short-lived, noting that “US bond yields resumed their climb, reversing much of the initial reaction to the Treasury's surprise expansion of its long-end buyback programme.” He frames the move as a “yield reality check,” underscoring lingering concerns over the sustainability of lower long-term borrowing costs in the face of ongoing fiscal and structural pressures.
US Dollar FAQs
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.
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.
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.
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.
