United States Dollar Index weakens below 99.00 on Fed repricing, Treasury bond buybacks
- US Dollar Index softens to near three-month lows around 98.80 in Thursday’s early European session.
- Fading Fed rate hike bets and Treasury bond buybacks undermine the DXY.
- Trump announced ‘most crushing economic operation ever’ against Iran; UAE halts trade with Iran.
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 98.80 in the early European trading hours on Thursday. The DXY declines to the lowest since late May as traders reduce their bets on a Federal Reserve (Fed) interest rate hike despite ongoing Middle East tensions.
Unexpected job losses in July and tame US inflation data released last week have dampened market expectations for a Fed rate increase, weighing on the US Dollar against its rivals. Markets are now pricing a 32.7% probability of a Fed rate hike at the September policy meeting, down from 47% a month earlier, according to the CME FedWatch Tool.
Furthermore, an expansion of bond buyback operations by the US Treasury and mounting concerns over US national debt surpassing $40 trillion contribute to the DXY’s downside. Reuters reported on Wednesday that the US Treasury Department will buy back more of its longer-term bonds in an effort to curb a sharp increase in borrowing costs. The current maximum size of $2 billion per operation will be increased to at least $4 billion per operation.
On the other hand, the ongoing US-Iran conflict and uncertainty surrounding the Strait of Hormuz could boost a safe-haven currency such as the US Dollar. US President Donald Trump announced the most severe economic action ever taken against Iran, per CBS News.
Trump said this will be economic conflict and isolation on an unprecedented scale and the countries allowing financial aid to Iran will face severe economic consequences. Meanwhile, the United Arab Emirates (UAE) said it is suspending all trade with Tehran after two ballistic missiles targeted the UAE. Iran denied firing the missiles.
Dollar trades sideways as Strait of Hormuz risks keep USD range-bound
DBS Group Research economist Chang Wei Liang observes that the Dollar remains "range-bound as markets grapple with renewed uncertainties over the Strait of Hormuz." He notes that the USD is trading largely sideways as investors weigh renewed geopolitical risks in the key shipping corridor alongside the recent bond sell-off, with currency markets reluctant to push the Dollar decisively higher despite the more unsettled backdrop.
Technical Analysis: US Dollar Index keeps a bearish vibe, with oversold RSI
In the daily chart, the near-term bias of Dollar Index Spot is bearish as price holds below the 100-day simple moving average (SMA) and the middle Bollinger Band, keeping the index capped within the lower half of the recent volatility envelope. The Relative Strength Index (RSI) at 29.60 sits in oversold territory, hinting that while downside pressure dominates, the pace of the decline could start to moderate rather than accelerate.
On the downside, initial support is aligned with the lower Bollinger Band near 98.55, where sellers may begin to hesitate. On the topside, immediate resistance emerges at the 100-day SMA at 99.72, followed by the middle Bollinger Band around 100.00. A sustained recovery above these levels would be needed to relieve the current bearish tone, with the upper Bollinger Band near 101.50 marking a more distant hurdle.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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.