US Dollar Index holds gains near 99.50 due to Iran conflict uncertainty

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US Dollar Index strengthens as safe-haven demand rises amid heightened Middle East tensions.
Saudi Arabia signals potential direct military engagement in the Iran conflict.
Fed’s Mary Daly said higher oil prices could complicate the Federal Reserve’s policy outlook.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, recovers its recent losses from the previous day and is trading around 99.40 during the early European hours on Tuesday. Traders remain focused on incoming economic data, with the flash S&P Global US Purchasing Managers’ Index (PMI) for March due later in the day, which could provide fresh insights into the health of the US economy.

Heightened uncertainty surrounding the Iran conflict has driven investors toward the Greenback, reinforcing its appeal during periods of market stress. Geopolitical risks have intensified as US-aligned Gulf states move closer to direct involvement in the Iran conflict. Potential attacks on critical energy infrastructure would raise fears of broader regional instability.

According to a Wall Street Journal report, Saudi Arabia has signaled a potential shift toward more direct military engagement, highlighting growing concern among key regional players. Meanwhile, Israel and the United States have launched a new wave of strikes on Iran, with Tehran responding by escalating attacks on Gulf neighbors and issuing threats against regional assets.

Israel confirmed a second round of strikes targeting infrastructure in Tehran, while senior military adviser Mohsen Rezaei stated that the conflict would continue until Iran is fully compensated for damages.

The US Dollar gained ground on Monday after US President Donald Trump delayed planned strikes on Iranian energy infrastructure by five days, citing productive discussions with Tehran. However, Iranian Foreign Minister Abbas Araghchi denied that any engagement with Washington had taken place, underscoring conflicting narratives.

Adding to the uncertainty, Reuters reported that Mary Daly, President of the Federal Reserve Bank of San Francisco, indicated that if the conflict persists and leads to sustained increases in oil prices, it could complicate the Fed’s policy outlook. Daly noted that unless the situation stabilizes quickly, it may not be clear what the central bank’s next move on interest rates will be, leaving markets sensitive to both geopolitical and economic developments.

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.