United States Dollar Index strengthens as US and Iran agree to 60-day truce, Trump yet to approve

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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 99.00 during the Asian trading hours on Friday.

US Dollar Index strengthens to around 99.00 in Friday’s Asian session.
JD Vance said the US and Iran are 'very close' to deal but 'not there yet.’
The US core PCE inflation hit an annual rate of 3.3% in April, as expected.

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 99.00 during the Asian trading hours on Friday. The DXY posts modest gains after reports that the United States (US) and Iran had ‌reached an agreement to extend a ceasefire, though US President Donald Trump has not signed off on it yet.

Bloomberg reported on Thursday that Washington and Tehran have reached a tentative deal to extend a ceasefire by 60 days and launch further talks on Iran's nuclear program. Hopes that the three-month conflict could be nearing a resolution might weigh on a safe-haven currency such as the US Dollar.

US Vice-President JD Vance said on Friday that the US and Iran still need to work out several sticking points before an agreement on the war can be reached. Asked by the BBC if Trump was close to signing a deal, Vance stated it was too early to say "when or if" the two sides would finalize an agreement.

The US Personal Consumption Expenditures (PCE) Price Index climbed by 3.8% YoY in April, versus 3.5% prior, according to the US Bureau of Economic Analysis (BEA) on Thursday. This figure came in line with the market expectation.

Meanwhile, the core PCE Price Index, which excludes volatile food and energy prices, rose 3.3% YoY in April, compared to 3.2% in March, as anticipated. On a monthly basis, the PCE Price Index and the core PCE Price Index increased 0.4% and 0.2%, respectively. This report signaled that the US Federal Reserve (Fed) could hold interest ‌rates unchanged for longer.

Traders are now pricing in nearly a 36.6% probability that the Fed will raise interest rates by 25 basis points (bps) by year-end, according to the CME FedWatch tool.

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.