The US Dollar Index (DXY), which tracks the value of the US dollar against six major currencies, has declined from an 11-week peak of 100.57, now trading around 100.30 as of Thursday’s Asian session.
Late on Wednesday, the dollar saw a dip as the appeal for safe-haven currencies diminished, following a BBC report that the White House confirmed a preliminary agreement had been reached between U.S. President Donald Trump and Iranian President Masoud Pezeshkian. This agreement aims to halt the ongoing U.S.-Israel conflict with Iran. This significant step came after an electronic signature of the initial framework was completed by U.S. Vice President J.D. Vance and Iranian Parliament Speaker Mohammad Bagher Ghalibaf earlier this week.
Nonetheless, the dollar might bounce back since the U.S. Federal Reserve appears more inclined to increase interest rates later this year. A summary from the Fed’s June economic forecast indicated that half of the Federal Open Market Committee (FOMC) members anticipate at least one rate hike this year. Despite the economic chaos stemming from the Iran situation, robust job data and ongoing inflation control efforts are still putting pressure on the Fed to tighten policy.
The FOMC unanimously decided to keep the benchmark federal funds rate between 3.5% and 3.75%. Federal Reserve Chairman Kevin Warsh, who recently took office, has committed to aggressively restoring price stability during the central bank’s first meeting with him at the helm.
US Dollar Frequently Asked Questions
The United States Dollar (USD) is not just the official currency of the U.S.; it’s also widely used in various other nations, often alongside local currencies. It stands as the most commonly traded currency worldwide, making up over 88% of the global foreign exchange trading volume with an average daily trading value of about $6.6 trillion, based on 2022 statistics. The US dollar took over from the British pound as the world’s reserve currency after World War II. Historically, it was backed by gold until the gold standard was dismantled in 1971 due to the Bretton Woods agreement.
The major factor affecting the value of the US dollar is the monetary policy set by the Federal Reserve System (Fed). The Fed has two primary roles: ensuring price stability (keeping inflation in check) and fostering full employment. Adjusting interest rates is their main strategy for achieving these objectives. If inflation spikes beyond the Fed’s 2% target, they’ll raise interest rates to support the dollar’s value. Conversely, if inflation dips below 2% or if unemployment rises significantly, they might look to lower rates, which can negatively affect the dollar.
In extreme cases, the Federal Reserve can increase the money supply by implementing quantitative easing (QE). This approach is used to boost credit flow in a stagnant financial system. Essentially, it’s a last-resort tool that comes into play when banks are hesitant to lend to each other, fearing defaults. During the Great Financial Crisis of 2008, QE was a key tactic, where the Fed printed more dollars to purchase U.S. Treasuries, mainly from financial institutions, often resulting in a weaker dollar.
Quantitative tightening (QT), on the other hand, is when the Federal Reserve halts bond purchases and does not reinvest the principal from maturing bonds into new ones. This process typically supports a stronger dollar.
