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

Monday's decline in the US Dollar Index approaches 0.4%, taking it to intraday lows below 102.00.
Hopes of renewed US-Iran peace negotiations prompt investors to sell safe-haven assets, including the US Dollar.
Further US Dollar losses are likely to be contained by market expectations of a Fed rate hike in December.

Riskier currencies are finding favour as market sentiment improves on Monday, leaving the safe-haven US Dollar (USD) at the bottom of the major-currency performance table. Negotiations aimed at securing peace in the Middle East appear to be advancing, while Oil prices have fallen towards two-month lows. Against this backdrop, the US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, is down nearly 0.4% at session lows below 102.00.

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

A more upbeat mood has marked the start of the trading week. By lunchtime, leading European stock markets are up between 0.7% and 1.4%, while Wall Street futures point to a positive opening. Falling Oil prices have helped counter concerns over excessive AI financing, at least for the time being.

Can Stronger Diplomatic Efforts Bring the US and Iran Back to Talks?

Support for the US Dollar is also weakening as reports point to stepped-up efforts to resume talks between US and Iranian negotiators. In an earlier report on Monday, Reuters said 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 in the day. The discussions will focus on progress made in the negotiating process so far.

Risk appetite also received a boost from Trump on Sunday, when he said he was highly unlikely to order fresh attacks on Iran while efforts to end the conflict remained under way.

Encouraging US employment figures have consequently moved out of the spotlight. Nevertheless, last Friday's strong Nonfarm Payrolls (NFP) report, alongside growing expectations of a Federal Reserve (Fed) rate increase in December, is likely to limit USD losses. With this backdrop, Tuesday's US Consumer Price Index (CPI) release is likely to attract particularly close scrutiny.

The latest spell of US Dollar strength 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,” pointing to scope for the currency's recent gains to fade.

US Dollar: Frequently Asked Questions

What Role Does the US Dollar Play?

Alongside being the official currency of the United States of America, the US Dollar (USD) serves as the ‘de facto’ currency in a significant number of other countries, circulating together with local banknotes. No other currency is traded more widely. According to 2022 data, it accounts for over 88% of worldwide foreign exchange turnover, equivalent to an average of $6.6 trillion in daily transactions. After the Second World War, the USD replaced the British Pound as the world's reserve currency. Gold backed the US Dollar for much of its history, until the Bretton Woods Agreement in 1971 brought an end to the Gold Standard.

Why Do Federal Reserve Decisions Matter for the US Dollar?

Monetary policy, determined by the Federal Reserve (Fed), is the single biggest influence on the US Dollar's value. Ensuring price stability by controlling inflation and promoting full employment are the Fed's two mandates. Adjustments to interest rates are its main means of pursuing these objectives. If prices increase too rapidly and inflation exceeds the Fed's 2% target, the central bank raises rates, supporting the USD. By contrast, inflation below 2% or an excessively high Unemployment Rate may prompt the Fed to cut interest rates, putting pressure on the Greenback.

How Does Quantitative Easing Work, and What Does It Mean for the US Dollar?

When conditions become extreme, the Federal Reserve can resort to printing additional Dollars and implementing quantitative easing (QE). Through QE, the Fed sharply expands the supply of credit within a financial system that is no longer functioning smoothly. This unconventional policy is used when credit has dried up as banks refuse to lend to one another for fear of counterparty default. 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, QE was the Fed's preferred response to the credit crunch. Under this approach, newly printed Dollars are used to purchase US government bonds, mainly from financial institutions. The US Dollar typically weakens as a result of QE.

How Does Quantitative Tightening Work, and What Does It Mean for the US Dollar?

By reversing this process, quantitative tightening (QT) usually supports the US Dollar. Under QT, the Federal Reserve ceases bond purchases from financial institutions and, when bonds in its portfolio mature, does not reinvest the principal in fresh purchases.