US Dollar Index posts modest gains above 98.00, US-Iran talks and US Retail Sales in focus
- US Dollar Index posts modest gains around 98.10 in Tuesday’s Asian session.
- US Vice President JD Vance will travel to Pakistan for talks with Iran.
- The US March Retail Sales report is due later on Tuesday.
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 98.10 during the Asian trading hours on Tuesday. The DXY trades with mild gains as traders await the developments surrounding the US-Iran talks.
US President Donald Trump stated that US Vice President JD Vance is leaving later on Monday to resume negotiations, “either Tuesday night or Wednesday morning,” Bloomberg reported, citing people familiar with the plans. Vance is expected to be joined by Jared Kushner and special envoy Steve Witkoff.
The next round of talks is expected to take place in Pakistan. Iran is also sending a team, although it is unclear who would lead the delegation. Earlier Tuesday, Trump said that he’s not likely to extend the two-week ceasefire with Iran, increasing the urgency for negotiators to reach a deal to end the war.
The US March Retail Sales report will be in the spotlight later on Tuesday. Retail Sales are projected to show a rise of 1.4% MoM in March, compared to 0.6% in February. In case of a softer-than-expected reading, this could undermine the US Dollar (USD) in the near term.
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.