US Dollar Index holds losses near 99.50 as US-Iran talks face uncertainty
- US Dollar Index eases as markets track Middle East developments, with uncertainty over efforts to resolve the Iran conflict.
- Senior Iranian officials review the US proposal but show no willingness to engage in talks with Washington.
- TD Securities strategists say the Fed faces conflicting signals from the Iran-driven oil shock.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, inches lower after two days of gains and is trading around 99.60 during the Asian hours on Thursday.
The Greenback struggles as traders are watching Middle East developments closely, with uncertainty surrounding efforts to end the Iran conflict. The White House stated that talks are ongoing, with the Trump administration reportedly sending a 15-point proposal to Iran via Pakistan to resolve the conflict.
Senior Iranian officials are reviewing the US proposal, but have signaled no willingness to engage in talks with Washington. However, Tehran indicated it would reject a US ceasefire offer, instead putting forward a five-point plan that includes sovereign control over the Strait of Hormuz.
TD Securities strategists Oscar Munoz and Eli Nir note that the Federal Reserve (Fed) faces mixed signals as the Iran conflict triggers an oil shock. They add that the US economy remains uneven, with the dual mandate still in tension, and expect the Fed to remain on hold in the near term before potentially cutting rates later in 2026 if conditions permit.
Conflict-related disruptions have driven energy prices higher, stoking inflation concerns and reinforcing expectations that the Federal Reserve will keep rates steady this year. Investors now look to Thursday’s weekly Initial Jobless Claims for fresh labor market signals.
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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