US Dollar Index gains ground above 99.00 on resilient US labour data, eyes US-Iran deal

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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 99.25 during the early Asian trading hours on Friday.

US Dollar Index drifts higher to around 99.25 in Friday’s early Asian session.
US Initial Jobless Claims fell to 209K last week, compared to 212K prior.
An Iranian official said no deal has been reached yet, but gaps have narrowed.

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 99.25 during the early Asian trading hours on Friday. The DXY gains momentum as investors weigh the likelihood of a near-term deal to end the Middle East war. The US May Michigan Consumer Sentiment Index report will be published later on Friday.

Data released by the US Department of Labor on Thursday showed that the number of Americans filing claims for unemployment benefits fell last week, indicating labor market resilience and providing the Federal Reserve (Fed) with room to focus on rising inflation.

Markets reprice the chance that the Fed would have to tighten policy to contain inflation with the Strait of Hormuz remaining closed and energy markets disrupted. Markets are pricing in a 41.9% chance that the US central bank will raise interest rates by 25 basis points (bps) by year-end, according to the CME FedWatch tool.

Reuters reported that US President Donald Trump will swear in Kevin Warsh, his hand-picked choice to lead the Fed, during a ceremony on Friday. The new Fed Chair will succeed Jerome Powell, whose term expired Friday but who continues to serve on a pro-tempore basis until Warsh officially takes over.

Traders will closely monitor the developments surrounding US-Iran peace talks. Iranian officials said that no deal has been reached with the US, but gaps have been narrowed. Nonetheless, the Islamic Republic’s Supreme Leader, Mojtaba Khamenei, stated that Iran’s uranium enrichment and Tehran’s control over the Strait of Hormuz remain among the sticking points.

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.