US Dollar Index (DXY) holds gains near 99.00 as geopolitical tensions grow

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The US Dollar (USD) remains strong against its main peers on Friday, with the USD Index (DXY) steady at the upper range of the 98.00s, as investors are reluctant to take excessive risks. The DXY is on track for a 0.4% weekly gain as tensions between the US and Iran escalate.

The US Dollar Index is steady near 99.00, on track for a 0.4% weekly gain.
Escalating tensions between the US and Iran have pushed Investors back to the US Dollar.
Later on Friday, US Defense Secretary Hegseth will hold a conference about Iran's war.

US President Donald Trump extended the ceasefire this week, but that did not help to calm the waters, as Iran maintained the Strait of Hormuz closed for the eighth week, while the US military kept the blockade of Iran’s ports. Meanwhile, the peace talks remain in a deadlock with no date for a new round of conversations, which were expected to resume this week.

On Thursday, Trump said on social media that the clock is ticking for Iran to seal a peace agreement, while Israel threatened to complete the elimination of the Khamenei dynasty and bring Iran to the Stone Age as soon as the US gives the “green light.”

Tehran’s Deputy President, Esmaeil Saqab Esfahani, on the other hand, has warned of an “eye for an eye” to the US, threatening to attack oil facilities of Gulf countries, if the US targets Iranian energy sites.

In this backdrop, US Defense Secretary Pete Hegseth and the chair of the Joint Chiefs of Staff, Dan Caine, have announced a press conference at 08:00 AM ET (12:00 GMT), to inform about the Operation Epic Fury against Iran.

On the macroeconomic front, US data has been Dollar supportive this week. The preliminary S&P Global Purchasing Managers' Index (PMI) data for April confirmed a solid economic activity, despite Iran’s war. Jobless claims rose moderately but still at levels consistent with a steady labour market.

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.