US Dollar Index holds gains above 99.00 due to rising odds of hawkish Fed stance

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The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is gaining ground after posting modest losses in the previous day and trading around 99.10 during the Asian hours on Tuesday.

US Dollar Index draws support from expectations of a more hawkish stance from the US Federal Reserve.
The 10-year US Treasury yield spiked to 4.659%, its highest since February 2025, before retracing to 4.591%.
Geopolitical tensions eased temporarily as President Trump delayed a planned military strike on Iran at Gulf states' request.

The US Dollar draws support from expectations of a more hawkish stance from the US Federal Reserve (Fed). In overnight trading, the yield on the benchmark 10-year US Treasury note jumped to 4.659%, its highest level since February 2025, before retracing to sit nearly flat on the day at 4.591%. This sharp rise in yields reflects market anxieties that elevated energy costs could flow into consumer price inflation, ultimately prompting the Federal Reserve to push interest rates higher.

Market participants are also closely watching the US central bank's internal dynamics. Reuters cited Lou Brien, market strategist at DRW Trading, noting that recent market volatility stems from investors testing how newly appointed Fed Chair Kevin Warsh will handle rising inflation. Brien emphasizes that Wall Street wants reassurance that Warsh will prioritize the Fed's traditional mandate and operate independently rather than bending to political pressure from the White House.

However, the Greenback faced safe-haven headwinds following an improvement in overall market sentiment. This shift occurred after US President Donald Trump announced he was delaying a planned military strike on Iran. According to reports, Trump called off the Tuesday attack following appeals from Persian Gulf allies requesting more time to negotiate a diplomatic resolution. While the US administration noted it remains prepared to strike if an acceptable agreement is not reached, no firm deadline has been set.

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.