The US dollar index (DXY), which tracks the value of the greenback against a basket of six major currencies, reversed earlier losses on Wednesday as traders digested the latest developments surrounding US-Iran talks. At the time of writing, the index is trading around 99.25 after bouncing from an intraday low of 98.97.
Earlier in the day, the US dollar came under pressure after Iran’s state TV reported that Tehran and Washington had drawn up preliminary informal framework for a memorandum of understanding (MOU). However, sentiments later changed when the United States rejected Iranian media reports calling the draft of the alleged interim peace agreement a “complete fabrication”.
While diplomatic talks between Washington and Tehran continue, recent developments suggest progress may be slower than markets expected earlier this week, as reports indicated the two sides are moving toward a potential deal that could eventually lead to the reopening of the Strait of Hormuz.
US President Donald Trump struck a cautious tone on Wednesday, saying, “We’re not on the Iran deal yet. We’re not satisfied with it,” while also warning, “Maybe we go back and kill it, maybe we don’t.” Separately, Trump told PBS News that Iran would not receive sanctions relief in exchange for giving up highly enriched uranium.
Meanwhile, US Secretary of State Marco Rubio said, “I think there has been progress toward an agreement. We’ll see in the next few hours, days.” Rubio said, “Trump’s priority is to negotiate with Iran. We will continue to work on Iran diplomacy.”
Despite signs of diplomatic engagement, traders remain skeptical that a final agreement can be reached in the near term, keeping fluctuations in the US dollar limited.
Against this backdrop, the greenback also continues to be supported by the hawkish Federal Reserve (Fed) approach. Although crude oil prices have declined from recent highs, they remain well above pre-war levels, while the broader US macroeconomic backdrop reflects resilient growth. As a result, the market expects the Fed to remain patient and keep interest rates on hold for the near future before moving back to policy easing.
Traders now await US personal consumption expenditure (PCE) data due on Thursday and speeches from several Fed officials later this week for new clues on the interest rate path.
Fed FAQ
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and to promote full employment. Its primary tool to achieve these goals is to adjust interest rates. When prices are rising too fast and inflation is above the Fed’s 2% target, it raises interest rates, which increases borrowing costs throughout the economy. This results in a strengthening of the US dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the unemployment rate is too high, the Fed may lower interest rates to encourage borrowing, which has an impact on the greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. Twelve Fed officials participate in the FOMC – the seven members of the Board of Governors, the President of the Federal Reserve Bank of New York, and four of the remaining eleven regional reserve bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy called quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit into a stuck financial system. It is a non-standard policy measure used during a crisis or when inflation is extremely low. It was the Fed’s weapon of choice during the great financial crisis in 2008. This involves the Fed printing more dollars and using them to buy higher grade bonds from financial institutions. QE generally weakens the US dollar.
Quantitative tightening (QT) is the opposite process of QE, whereby the Federal Reserve stops purchasing bonds from financial institutions and does not reinvest the principal from maturing bonds to purchase new bonds. This is generally positive for the value of the US dollar.
