United States Dollar Index holds ground near 101.00 amid rising safe-haven demand
- US Dollar Index gains as rising US-Iran tensions drove oil prices up, boosting inflation fears.
- September Fed rate hike odds ticked up to 55%, compared to 51% a day earlier.
- Ten days of US strikes on Iran met continued Iranian retaliation against regional neighbors, heightening Middle East instability.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is remaining in the positive territory and trading around 101.00 during the Asian session on Tuesday.
The Greenback receives support from rising safe-haven demand amid ongoing hostilities between the United States (US) US and Iran, which drove oil prices higher, reviving concerns about inflation and interest rate hikes.
Market expectations for a September Fed rate hike have ticked up to around 55%, compared to 51% yesterday. In the meantime, Federal Reserve officials have entered their traditional blackout period ahead of next week's FOMC meeting, where policymakers are widely anticipated to hold the federal funds rate steady.
US attacks on Iran continued for a tenth straight day. The ongoing campaign has coincided with continued retaliatory strikes from Tehran against neighboring countries, further escalating instability across the region.
Geopolitical friction escalated after President Donald Trump warned that Iran would be held directly accountable for the deaths of three U.S. service members. Adding to the market's anxiety, Iran-backed Houthi militants announced a maritime embargo against Saudi Arabia, threatening critical energy shipments moving through the Red Sea.
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.
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