US Dollar Index hovers around 98.00 as safe-have demand eases on US-Iran optimism

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The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is remaining steady after posting nearly 0.5% losses in the previous day and trading around 98.00 during the Asian hours on Thursday.

US Dollar Index weakens as optimism over a potential US-Iran deal reduces safe-haven demand.
Lower oil prices ease inflation concerns and reduce expectations for a prolonged hawkish Fed stance.
Fed’s Goolsbee warned that inflation has accelerated since the conflict, moving further from the Fed’s 2% target.

The Greenback struggles amid easing safe-haven demand on optimism surrounding a potential US-Iran agreement, which triggered a sharp drop in oil prices, easing inflation concerns, and reducing expectations for a prolonged hawkish Federal Reserve (Fed) outlook.

However, Chicago Fed President Austan Goolsbee cautioned that inflation has not continued to moderate toward the Federal Reserve’s 2% target and has instead accelerated since the conflict began.

The BBC reported on Wednesday that Iran said a US proposal to end the conflict is “still being considered,” despite reports suggesting both sides may be nearing an agreement. According to reports, the US submitted a one-page memorandum of understanding to Iran that would gradually reopen the Strait of Hormuz and ease the American blockade on Iranian ports. Discussions regarding Iran’s nuclear program would follow later, though no final agreement has been reached.

Meanwhile, CNBC reported that US President Donald Trump warned Iran would face bombing “at a much higher level” if it refuses to agree to a peace deal. In a Truth Social post, Trump said the US military campaign, dubbed Operation Epic Fury, “will be at an end” if Iran “agrees to give what has been agreed to.”

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.