The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, struggles for a firm near-term direction and extends its consolidative price moves for the third straight day on Tuesday. The index trades below the 101.00 mark during the Asian session and is influenced by a combination of diverging forces.
A 60-day US-Iran ceasefire is under strain amid rising tensions in the critical Strait of Hormuz, which, in turn, is seen acting as a tailwind for the safe-haven US Dollar (USD). In fact, a maritime agency reported that an oil tanker was struck by an unidentified projectile while transiting through the strait. Furthermore, Iran aims to cement strategic control over the strategic waterway and collect service fees from commercial vessels, despite strong opposition from the US.
The US-Iran standoff fuels concerns about the sustainability of the US-Iran peace deal and leads to a modest uptick in Crude Oil prices, reviving inflation fears and further supporting the Greenback. However, receding Federal Reserve (Fed) rate hike bets hold back the USD bulls from placing aggressive bets. Traders shifted expectations from one to two Fed rate increases in 2026 to between zero and one hike following the release of the soft US Nonfarm Payrolls (NFP) report for June.
Meanwhile, the US ISM Services PMI, released on Monday, eased to 54.0 in June from 54.5 in the previous month, matching consensus estimates and doing little to impress the USD bulls. This, in turn, warrants some caution before positioning for the resumption of the recent strong move up from the 97.45-97.40 support, touched in April and May. The market focus now shifts to the release of FOMC Minutes, due on Wednesday, which should provide a fresh impetus to the DXY.
US Dollar FAQs
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.
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.
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.
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.
Source: Original Article
