United States Dollar Index holds losses as Iran peace hopes hurt safe-haven demand

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The US Dollar (USD) retraces gains on Friday amid a brighter market mood.

The US Dollar Index remains close to one-week lows at 99.60, on track for a 0.35% weekly decline.
Hopes of a peace deal between the US and Iran have boosted market sentiment, hurting demand for the safe-haven USD.
On Thursday, mixed US PPI figures pushed back Fed tightening hopes.

The US Dollar (USD) retraces gains on Friday amid a brighter market mood. The US Dollar Index (DXY), which measures the value of the Greenback against a basket of currencies, has returned to levels a few pips above one-week lows, at 99.60, on track for a 0.35% weekly decline, as hopes of a US-Iran peace deal have undermined speculative demand for the safe-haven USD.

Investors have welcomed comments by US President Donald Trump affirming that he cancelled plans for a third day of attacks on Iran after a breakthrough in the negotiations. The deal, which is still pending approval by Tehran, would prevent Iran from developing a nuclear weapon and allow the reopening of the Strait of Hormuz, a key waterway for about 20% of the global Crude supply.

Iranian authorities feed hopes of a peace deal

Iranian authorities stated that no final decision has been made yet, but the Foreign Ministry spokesperson, Esmail Baghaei, affirmed in local media that the document is being studied by the Iranian government and that it is “closer to being approved than ever before.”

The US Dollar Index rallied about 3% immediately after the US-Israel attack on Iran and has been acting as the market’s safe-haven asset of choice any time tensions have escalated in the region. In that sense, a durable peace agreement and, above all, the normalization of sea traffic through Hormuz, are highly likely to bring risk appetite back to the markets and send the DXY to pre-war levels around 97.50 or lower.

On the macroeconomic front, the US Producer Price Index (PPI) data, released on Thursday, was mixed. The headline PPI accelerated to 6.5% YoY in May, beyond expectations of a 6.4%, but the core figure during the same period remained unchanged at 4.9%, against market expectations of a 5.4%. This leads to the belief that the spillover from the energy shock might have been contained, which pushes back hopes of Federal Reserve rate hikes.

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.