The US Dollar Index (DXY), which gauges the value of the US Dollar against a basket of six major currencies, is currently experiencing a pullback from recent gains, trading around 97.70 during the Asian trading hours on Friday. Traders are keenly awaiting the release of the US Producer Price Index (PPI) for January, expected later today, which is forecast to show a slowdown in wholesale inflation to 0.3% month-on-month, down from December’s figure of 0.5%.
The Greenback’s performance is further complicated by ongoing uncertainty regarding US trade policy. Recently, former President Donald Trump announced plans to implement a blanket 15% tariff on imports following a Supreme Court ruling that invalidated his previous reciprocal tariff regime. Concurrently, US Trade Representative Jamieson Greer indicated that tariffs could potentially be raised to 15% or more for several countries in the coming days, heightening trade tensions.
Market sentiment appears to be shifting slightly in favor of the US Dollar due to safe-haven demand, particularly amid escalating geopolitical tensions. This follows Iran’s declaration that it will not permit enriched uranium to exit the country, leading to a more pronounced US military presence in the Middle East. President Trump issued warnings pertaining to possible military action should diplomatic resolutions falter.
Despite Iran’s Foreign Minister Abbas Araqchi characterizing Thursday’s negotiations as the most substantive to date—highlighting Tehran’s demands for sanctions relief and a framework to facilitate the lifting of restrictions—sources familiar with the US stance have indicated that American officials remain dissatisfied with the development. Future negotiations are set to resume after consultations in both nations, with technical-level meetings already lined up for next week in Vienna.
In terms of background, the US Dollar is not only the official currency of the United States but also functions as the de facto currency in numerous other countries. As the most heavily traded currency globally, it accounts for over 88% of all foreign exchange turnover—representing an average of $6.6 trillion in daily transactions as of 2022.
Historically, the US Dollar ascended to its status as the world’s reserve currency following World War II, overtaking the British Pound. For a significant part of its history, the Dollar was backed by gold until the Bretton Woods Agreement ended the Gold Standard in 1971.
The value of the US Dollar is primarily influenced by the monetary policy executed by the Federal Reserve (Fed), which has dual mandates: ensuring price stability and fostering full employment. To achieve these goals, the Fed adjusts interest rates. When inflation exceeds the Fed’s 2% target, it raises rates, typically strengthening the Dollar. Conversely, should inflation fall below this target or if unemployment rises significantly, the Fed may lower rates, potentially weakening the currency.
In extreme circumstances, the Fed can resort to printing more Dollars and implementing quantitative easing (QE), a strategy used to enhance credit flow in challenging financial contexts. QE was notably deployed during the Great Financial Crisis of 2008, involving the purchase of US government bonds from financial institutions. This usually results in a weaker US Dollar.
On the contrary, quantitative tightening (QT) refers to the Fed ceasing bond purchases and refraining from reinvesting the principal from maturing bonds, which generally supports a stronger US Dollar.
