US Dollar Index hovers around six-week highs near 99.50 after fresh Trump threats

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The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is extending its gains for the second successive day and hovering around the six-week high of 99.43, reached on Tuesday, during the Asian hours on Wednesday.

US Dollar Index reached a six-week high of 99.43 on Tuesday.
President Trump threatened to resume attacks on Iran within days to force a deal ending the conflict.
The US 30-Year Treasury Yield slid to 5.189% after hitting a near 19-year high of 5.200% on Wednesday.

The Greenback receives support from increased risk aversion stemming from the Middle East conflict. Bloomberg reported on Tuesday that US President Donald Trump recently threatened to resume attacks on Iran in two or three days as part of a push for a deal to end the war. This came after a brief pause in planned hostilities following a new proposal by Tehran to end the US-Israeli conflict. Meanwhile, an Iranian official stated that the US threat of a massive assault would be met resolutely, asserting that Iran is fully prepared to confront any military aggression.

War-driven energy price pressures have added to inflation risks, with earlier spikes in oil seen as reinforcing expectations that the Federal Reserve (Fed) may need to maintain higher interest rates for longer or even tighten policy further. Additionally, the sharp increase in yields reflects renewed concerns that inflation could remain elevated for longer than previously expected.

The US 30-Year Treasury Yield inched lower to 5.189% after reaching a nearly 19-year high of 5.200% on Wednesday. The 10-Year Treasury Yield remained stronger near its 16-month high of 4.687%, and the 2-year yield held near its 15-month high of 4.139%, with both of those peaks having been recorded on Tuesday.

Federal Reserve Bank of Philadelphia President Anna Paulson noted that current policy is mildly restrictive, which is helping to keep inflation pressures in check while maintaining a stable labor market. Paulson indicated that the current policy rate is suitable for applying downward pressure on inflation, though an appropriate rate increase remains possible if economic growth exceeds potential or if new inflation threats arise.

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.