US Dollar Index gathers strength above 100.00 on heightened uncertainty in the Middle East

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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 Tuesday.

US Dollar Index strengthens to around 100.10 in Tuesday’s Asian session.
Trump escalated threats to attack key Iranian infrastructure if his terms aren’t met before a Tuesday deadline.
US service sector cooled in March, with the ISM Services PMI declining to 54.0.

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 Tuesday. The DXY gains ground as escalating geopolitical tensions in the Middle East boost the safe-haven demand. The US Durable Goods Orders and ADP Employment reports will be published later on Tuesday.

US President Donald Trump said on Monday that the latest proposal for a US ceasefire with Iran is “not good enough.” He threatened to target Iran's power plants and bridges if the strategic waterway is not reopened, setting a precise deadline of Tuesday, 8 p.m. Eastern Time (00:00 GMT Wednesday).

The spokesperson for Iran’s top joint military command said that Trump’s threats will not make up for the “disgrace and humiliation” of the US in the region. Heightened uncertainty in the Middle East continues to boost the US Dollar against its rivals in the near term.

Surging oil prices due to the Iran war have complicated the US Federal Reserve (Fed) interest rate path. Cleveland Fed President Beth Hammack stated that a rate hike could be appropriate if inflation remains stubbornly high.

Data released by the Institute for Supply Management (ISM) on Monday showed that the Services PMI declined to 54.0 in March, versus 56.1 prior. This figure came in worse than the expectations at 55.0, signaling some loss of momentum in the sector.

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.