The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, currently trades near 101.00 in the early European trading hours on Thursday. The DXY weakens amid improved risk sentiment. However, the potential downside might be limited due to a flare-up in tensions between the United States (US) and Iran.
US President Donald Trump said that the US will “destroy one bridge or power plant” every time Iran targets a ship transiting the Strait of Hormuz. Meanwhile, Iran stated that it will hit infrastructure and energy facilities across the region.
Money markets are now pricing in a 33.7% probability of a rate hike from the US Federal Reserve (Fed) this month, as well as a 76.8% chance of at least a quarter-point hike in September, according to the CME FedWatch tool.
Technical Analysis:
In the daily chart, the near-term tone of Dollar Index Spot remains mildly bullish as price holds above the 100-day simple moving average (SMA) and operates near the upper half of the Bollinger envelope. However, the Relative Strength Index (RSI) at 54.36 sits in neutral-to-positive territory, hinting at steady rather than aggressive upside momentum.
On the topside, a daily close above the upper band at 101.45 would expose the June 24 high of 101.80. Any follow-through buying above this level could pave the way to the 102.00 psychologocal level.
On the downside, initial support is seen at the lower Bollinger band around 100.60. The key contention level is located at the 100.00 round mark, ahead of the more meaningful trend floor at the 100-day SMA near 99.65.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Fed seen on extended hold even as hiking bar falls
According to TD Securities, the policy outlook remains one of patience, with the bank expecting “the Fed to remain on an extended hold.” Strategists acknowledge that “the bar for the Fed to hike is lower,” but argue that the FOMC will “likely need to see more evidence of continued strength in inflation and the labor market before embarking on a hiking path.” TD Securities also cautions that in an environment where the Fed is forced to tighten “due to supply-side inflation concerns, other global central banks, including the ECB, are likely hiking as well,” reinforcing a more synchronised global policy backdrop.
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.
