United States Dollar Index consolidates above 100.50 as traders look to Trump's speech

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DXY struggles to capitalize on the previous day’s move higher as traders await Trump’s speech.
Escalating US-Iran tensions fuel inflation fears and bolster Fed hike bets, supporting the buck.
The fundamental backdrop favors USD bulls and supports prospects for some meaningful upside.

The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, is seen oscillating in a narrow range just above the 100.50 level as traders await US President Donald Trump's speech. In the meantime, escalating US-Iran tensions, along with reviving US Federal Reserve (Fed) rate-hike bets, act as a tailwind for the US Dollar (USD) and keep the index well above a nearly one-month low, touched on Wednesday.

The US intensified its strikes on Iran, with officials in southern Bandar Abbas reporting that civilian infrastructure – including power facilities and a train station – has been hit. The US also fired into a ship it accused of trying to break the renewed naval blockade on the Islamic Republic. Iran retaliated with missile and drone fire targeting US allies in the region and warned that its attacks may escalate. This keeps the geopolitical risk premium in play and turns out to be a key factor underpinning the safe-haven Greenback.

Meanwhile, Iran's Islamic Revolutionary Guard Corps had threatened to expand the conflict by targeting additional regional energy supply routes. Furthermore, Reuters reported that Iran has asked Yemen’s Houthis to stand ready to close the Red Sea oil route, posing a potent new threat to global energy supplies. The latest developments remain supportive of elevated Crude Oil prices, fueling inflation fears. Adding to this, hawkish remarks from a Fed official bolstered bets for at least one rate hike in 2026.

In fact, Dallas Fed President Lorie Logan said on Thursday that the positive news this week on consumer and wholesale prices still wasn’t good enough to signal real help for US households. She called for modestly higher interest rates to win a battle the central bank has been losing for the past five years. This turns out to be another factor lending support to the DXY, which remains on track to register weekly losses.

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.