US Dollar Index stays below 100.00 as Trump pause hits safe haven

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The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, edges lower after three days of gains and is trading around 99.90 during the Asian hours on Friday.

US Dollar Index depreciates as market sentiment improves after Trump said the US will pause attacks on Iran’s energy sector.
The US Dollar may rebound as inflation fears curb bets on Fed rate cuts, boosting hike expectations.
Fed officials said that higher energy prices should impact inflation.

The Greenback weakens on decreasing risk aversion after US President Donald Trump said Washington would pause attacks on Iran’s energy sector for 10 days at Tehran’s request, extending the April 6 deadline to allow more time for negotiations. However, the Wall Street Journal reported that mediators said Iran denied making such a request, underscoring fragile diplomacy and low odds of a near-term ceasefire.

The downside of the US Dollar could be restrained amid rising inflation concerns on the fading likelihood of further Federal Reserve (Fed) rate cuts and increased bets on a potential hike by year-end.

Federal Reserve (Fed) Vice Chair of Supervision Philip Jefferson said higher energy prices should have a modest impact on inflation, though a sustained shock could be more significant. Meanwhile, Fed Governor Michael Barr warned that another price shock could lift inflation expectations, reinforcing the case for the Fed to assess economic conditions before adjusting policy.

US Initial Jobless Claims came in exactly as expected at 210K on Thursday, offering little fresh direction. Attention now turns to Friday’s University of Michigan (UoM) consumer sentiment and one-year inflation expectations.

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.