United States Dollar Index (DXY) dips to the 99.00 area on Middle East peace hopes

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The US Dollar (USD) gapped lower at the start of Monday’s session, retreating from the 99.30 area, the lower limit of last week’s trading range, to 99.00.

The US Dollar Index is hovering at the base of last week's trading range, around 99.00.
Hopes of a peace deal with Iran are undermining demand for the Safe-haven US Dollar.
USD downside attempts remain limited amid rising bets of Fed tightening.

The US Dollar (USD) gapped lower at the start of Monday’s session, retreating from the 99.30 area, the lower limit of last week’s trading range, to 99.00. The pair remains supported above previous highs, but investors’ optimism about a peace deal between the US and Iran and the reopening of the Strait of Hormuz are undermining speculative demand for the safe-haven Greenback

Comments by US President Donald Trump suggesting that a deal with Tehran is close have boosted investors’ confidence and are fuelling a moderate risk appetite on Monday. Trump, however, maintains a mixed tone, as he also affirmed that he told negotiators “not to rush into a deal,” and warned that the US will keep the blockade on the Strait of Hormuz until a deal is signed.

Earlier on Monday, the US Secretary of State, Marco Rubio, said that there is a “fairly strong proposal at the table” to reopen Hormuz, and that the US will give diplomacy every chance before alternatives are considered.

The calendar is void on Monday, with the US markets closed on the Memorial Day bank holiday and investors awaiting the release of key US macroeconomic releases, namely the Personal Consumption Expenditures (PCE) Price Index data, which is due on Thursday.

Recent US data has boosted confidence in the resilience of the US economy, which, in the context of fast-rising prices, is adding pressure on the Federal Reserve (Fed) to raise interest rates. Markets have gone from anticipating further monetary tightening, ahead of the attack on Iran on February 28, to pricing a more than 50% chance of a rate hike this year, according to data by the CME Group’s Fed Watch Tool. This is likely to keep the US Dollar's downside attempts limited.

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.