- The USD kicks off the new week on a positive note in reaction to rising Middle East tensions.
- The Fed’s hawkish stance further lends support to the buck and contributes to the move up.
- Trade-related uncertainties cap the USD as traders await flash global PMIs for a fresh impetus.
The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, opens with a modest bullish gap and hits a nearly two-week high during the Asian session on Monday. The intraday uptick, however, lacks follow-through, with the index currently trading just above the 99.00 round figure, up over 0.25% for the day.
A further escalation of geopolitical tensions in the Middle East tempers investors’ appetite for riskier assets at the start of a new week and turns out to be a key factor that benefits the USD’s status as the global reserve currency. In fact, the US joined Israel in the military action against Iran and bombed three nuclear sites on Sunday. Adding to this, US Defense Secretary Pete Hegseth warned Iran against following through with past threats of retaliation.
Iran’s Foreign Minister Abbas Araghchi called the event outrageous and added that it will have everlasting consequences. This raises the risk of a wider regional conflict and triggers a fresh wave of a risk-aversion trade, underpinning traditional safe-haven assets. Apart from this, the Federal Reserve’s (Fed) hawkish signal last week, projecting only one 25-basis-point rate cut in each of 2026 and 2027, lend additional support to the USD Index.
However, the uncertainty over US President Donald Trump’s erratic trade policies and concerns about a slowing economy hold back the USD bulls from placing aggressive bets amid speculations that Iran will respond to the US airstrikes. Hence, the focus will remain glued to geopolitical developments, which will drive the broader risk sentiment. Apart from this, traders will take cues from the release of the flash global PMIs for some impetus.
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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