US Dollar Index advances after Trump and Iran dismissed latest peace initiatives
- US Dollar Index gains as risk aversion rises after President Trump and Iran rejected each otherâs latest peace proposals.
- President Trump rejected Iranâs latest peace proposal, calling it âtotally unacceptable.â
- US Nonfarm Payrolls rose by 115K in April, beating forecasts despite slowing from Marchâs 185K increase.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is holding gains after modest losses the previous day, trading around 98.10 during Asian hours on Monday.
The Greenback strengthens amid growing risk aversion after US President Donald Trump and Iran dismissed each otherâs latest peace initiatives aimed at ending the Middle East conflict. According to Bloomberg on Sunday, Trump turned down Iranâs latest peace proposal, describing it as âtotally unacceptable.â Iranian state television reported that an Iranian official said Tehranâs response emphasized ending the conflict across all fronts, particularly in Lebanon, and addressing the security of shipping routes through the strait, though no details were provided on how or when the key waterway could reopen.
An extended Middle East conflict and the fragile ceasefire between the US and Iran may continue to support safe-haven demand for the Greenback, potentially weighing on the major currency pair in the near term.
US Bureau of Labor Statistics released data on Friday indicating that Nonfarm Payrolls (NFP) increased by 115K in April, down from Marchâs 185K reading but still exceeding the market forecast of 62K. At the same time, the Unemployment Rate remained unchanged at 4.3% in April, matching analystsâ expectations.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the âde factoâ 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 worldâs 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 Fedâs 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 Fedâs 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.
