United States Dollar Index holds steady near 100.00 on Middle East tensions, rising Fed hike bets

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The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, currently trades near 100.10 during the Asian trading hours on Monday.

US Dollar Index trades flat around 100.10 in Monday’s Asian session.
Israel said it struck Iran after taking missile fire.
Traders ramp up bets on a Fed rate ‌hike this year after a stronger US jobs report.

The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, currently trades near 100.10 during the Asian trading hours on Monday. The DXY holds steady near a monthly high amid escalating tensions in the Middle East and rising bets of a Federal Reserve (Fed) rate ‌hike.

The Israel Defense Forces (IDF) said that it struck military targets in western and central Iran, hours after Iran fired a salvo of missiles at northern Israel, the BBC reported on Monday. Iranian state television reported the sound of explosions being heard in Isfahan, Tabriz and Tehran, without immediately elaborating.

US President Donald Trump said on Sunday he would tell Israeli Prime Minister Benjamin Netanyahu not to strike back after Iran fired a salvo of missiles at Israeli targets in retaliation for an attack on ‌the outskirts of Beirut, per Axios. Rising tensions in the Middle East could boost the safe-haven flows, supporting the US Dollar against its rivals in the near term.

The US economy posted a third straight month of strong job gains in May. The US Nonfarm Payrolls (NFP) rose by 172K in May, versus the 179K increase (revised from 115K), according to the Bureau of Labor Statistics on Friday. This figure came in stronger than the market expectation of 85K. Additionally, the Unemployment Rate remained unchanged at 4.3% in May, in line with the market consensus.

Markets are now pricing in more than 70% probability that the Fed will raise rates in December, sharply up from a 45% probability a week ago, according to the CME FedWatch tool.

"The U.S. payrolls report released... paints a picture of a U.S. labour market that is strengthening despite the ongoing energy price shock," said Jonas Goltermann, chief markets economist at Capital Economics.

"That combination makes policy tightening by the Fed later this year increasingly probable... we now expect the FOMC to deliver two 25-basis-point rate hikes later this year, in response to the energy supply shock and the re-acceleration of the U.S. labour market,” Goltermann added.

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.