US Dollar Index weakens to near 99.00 on US-Iran peace deal hopes

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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 99.05 during the Asian trading hours on Monday. The DXY loses momentum as the prospect of a deal to end the Iran war buoyed risk appetite.

US Dollar Index declines to around 99.05 in Monday’s early Asian session.
The US and Iran move closer towards a peace deal, even though they remain at odds over key issues.
Traders reprice the chance that the Fed would have to tighten policy to contain inflation, with the Strait of Hormuz remaining closed.

US President Donald Trump said on Sunday that Washington and Iran had "largely negotiated" a memorandum of understanding on a peace deal that would reopen the Strait of ‌Hormuz, per Reuters.

Nick Twidale, chief market analyst at ATFX Global, expects the market to embrace more risk on Monday but not to surge higher until there is confirmation that the Strait of Hormuz will reopen.

A lack of clarity over when the critical waterway would open kept enthusiasm in check. Tehran maintains a tight grip on shipping through the Strait of Hormuz, and the US refuses to lift its naval blockade on Iranian-linked vessels.

Rising inflationary pressures have shifted the US Federal Reserve (Fed) expectation toward potential future interest rate hikes rather than cuts. This, in turn, could lift the US Dollar against its rivals. Markets are pricing in a 45.1% probability that the Fed will raise interest rates by 25 basis points (bps) by year-end, according to the CME FedWatch tool.

The US Personal Consumption Expenditures (PCE) - Price Index report will take center stage on Thursday. If the report shows hotter-than-expected outcomes, this could boost the Greenback in the near term.

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.