United States Dollar Index holds losses after pulling back from 11-week highs

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The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, pulled back after reaching an 11-week high of 100.57 in the previous day and is now trading around 100.30 during the Asian hours on Thursday.

US Dollar Index remains subdued after pulling back from an 11-week high of 100.57 reached on Wednesday.
The Greenback slips as easing safe-haven demand followed a preliminary US-Iran memorandum of understanding to end the war.
The US Dollar may regain as half of the FOMC members expect at least one rate hike this year.

The Greenback slips on easing safe-haven demand following the BBC report late Wednesday, indicating that the White House confirmed that US President Donald Trump and Iranian President Masoud Pezeshkian signed a preliminary memorandum of understanding designed to end the US-Israel war on Iran. This decisive executive action follows the electronic signing of the initial framework by U.S. Vice President JD Vance and Iranian Parliamentary Speaker Mohammad Bagher Ghalibaf earlier in the week.

However, the US Dollar could rebound on rising odds of rate hikes by the Federal Reserve (Fed) later this year. The Fed’s June Summary of Economic Projections showed half of FOMC members expect at least one rate hike this year. Despite economic disruptions linked to the conflict in Iran, resilient labor market data and persistent underlying inflation measures continue to drive tightening pressures.

The Federal Open Market Committee (FOMC) voted unanimously to maintain its benchmark federal funds rate in the range of 3.5% to 3.75%. In his first meeting since taking the helm of the US central bank, the newly appointed Federal Reserve Chairman, Kevin Warsh, vowed to aggressively restore price stability.

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.