Below 102.00: US Dollar Index (DXY) retreats further as risk appetite strengthens

The US Dollar Index is down almost 0.4% on Monday. Intraday lows extend below 102.00.
Hopes for renewed US-Iran peace negotiations prompt investors to sell safe-haven assets, including the US Dollar.
US Dollar losses are likely to be contained by market expectations for a Fed rate increase in December.

The US Dollar Index (DXY) falls almost 0.4% on Monday. The gauge, which tracks the Greenback against a basket of six major currencies, reaches session lows below 102.00. Among major currencies, the safe-haven US Dollar (USD) is the weakest performer. An apparent advance in Middle East peace negotiations and Oil prices falling towards two-month lows are lifting market sentiment and supporting currencies perceived as riskier.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Between 0.7% and 1.4% gains on the main European bourses at lunchtime reflect a brighter start to the week for investors. Wall Street futures also point to a positive opening. Cheaper Oil has helped counter concerns over excessive AI financing, at least for now.

US-Iran Talks: Diplomatic Push to Resume Negotiations Intensifies

Support for the US Dollar is also weakening as reports point to greater efforts to restart negotiations between US and Iranian representatives. Earlier on Monday, Reuters reported that Qatari Prime Minister Sheikh Mohammed bin Abdulrahman Al-Thani would meet US President Donald Trump and Vice President JD Vance at the White House later that day. The meeting will address progress made in the negotiating process so far.

Risk appetite received a boost from Trump on Sunday. He said he was highly unlikely to authorise further attacks on Iran while efforts to end the conflict remained under way.

Strong US employment figures have consequently moved out of the spotlight. Even so, last Friday's robust Nonfarm Payrolls (NFP) report and growing bets on a December interest rate increase by the Federal Reserve (Fed) are likely to limit USD losses. Tuesday's US Consumer Price Index (CPI) release is therefore likely to receive close scrutiny.

The latest US Dollar rally could lose momentum if markets stabilise and yields decline, according to strategists at ING. They argue that “unless risk sentiment remains poor this week, lower front-end US rates should favour a weaker Dollar, even if inflation tomorrow comes in slightly hotter than expected,”.

US Dollar: Key Questions Answered

The US Dollar's Role

As the official currency of the United States of America, the US Dollar (USD) also circulates alongside local banknotes in a significant number of other countries, serving as their ‘de facto’ currency. No other currency is traded more heavily. Data from 2022 show that it accounts for over 88% of global foreign exchange turnover, equivalent to average daily transactions of $6.6 trillion. After the Second World War, the USD replaced the British Pound as the world's reserve currency. Gold backed the US Dollar for most of its history, until the Bretton Woods Agreement in 1971 brought the Gold Standard to an end.

Federal Reserve Decisions and the US Dollar

Monetary policy set by the Federal Reserve (Fed) is the single biggest influence on the US Dollar's value. Achieving price stability by controlling inflation and promoting full employment are the Fed's two mandates. Interest rate adjustments are its main means of pursuing both objectives. If prices rise too rapidly and inflation exceeds the Fed's 2% target, it raises interest rates, supporting the USD. Conversely, inflation below 2% or an excessively high Unemployment Rate may prompt rate cuts, putting pressure on the Greenback.

Quantitative Easing: Effects on the US Dollar

Printing additional Dollars and introducing quantitative easing (QE) are also options for the Federal Reserve in extreme circumstances. Through QE, the Fed sharply expands the supply of credit within a stalled financial system. This unconventional policy is deployed when banks' reluctance to lend to one another, driven by fears of counterparty default, has caused credit to dry up. It serves as a last resort when interest rate cuts alone are unlikely to deliver the required outcome. During the Great Financial Crisis in 2008, the Fed chose this tool to tackle the credit crunch. The process entails printing more Dollars to purchase US government bonds, mainly from financial institutions. A weaker US Dollar is the usual result of QE.

Quantitative Tightening: Effects on the US Dollar

The opposite process is quantitative tightening (QT). Under QT, the Federal Reserve halts bond purchases from financial institutions and refrains from reinvesting principal repaid on its maturing bond holdings in new purchases. This generally supports the US Dollar.