US Dollar Index (DXY) extends reversal below 102.00 as risk appetite improves

The US Dollar Index drops nearly 0.4% on Monday, reaching daily lows below 102.00.
Investors are selling safe havens, like the US Dollar, amid hopes of another round of US-Iran peace talks.
Market expectations of a Fed rate hike in December are likely to keep US Dollar dips limited.

The safe-haven US Dollar (USD) is showing the weakest performance among major currencies on Monday, as improving market sentiment boosts riskier-perceived currencies, with negotiations for a Middle East peace apparently making progress and Oil prices dropping to levels near two-month lows. The US Dollar Index (DXY), which measures the value of the Greenback against a basket of six majors, dips nearly 0.4%, reaching session lows below 102.00.

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Investors' mood has improved at the week's opening. The main European bourses are showing gains between 0.7% and 1.4% at lunchtime, and Wall Street futures are set for a positive open, as lower Oil prices have contributed to offset market concerns about AI overfinancing, at least for now.

Diplomatic efforts to bring US and Iran to the negotiating table intensify

News reporting intensifying efforts to bring US and Iranian negotiators back to the table is also undermining support for the US Dollar. Reuters reported earlier on Monday that Qatari Prime Minister Sheikh Mohammed bin Abdulrahman Al-Thani will meet US President Donald Trump and Vice President JD Vance at the White House later in the day to discuss advances in the negotiating process so far.

Trump contributed to boost appetite for risk on Sunday, affirming that he was highly unlikely to order new attacks on Iran while efforts to bring the conflict to an end continue.

This has sent the bright US labour data to the rear seat, although the strong Nonfarm Payrolls (NFP) report seen last Friday and rising bets that the Federal Reserve (Fed) will hike rates in December are likely to set a floor on USD dips. Against this background, US Consumer Price Index (CPI) data, due on Tuesday, is likely to be analysed with particular interest.

Strategists at ING 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,” suggesting the latest bout of US Dollar strength could fade if markets stabilise and yields ease.

US Dollar FAQs

What is the US Dollar?

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.

How do the decisions of the Federal Reserve impact the US Dollar?

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.

What is Quantitative Easing and how does it influence the US Dollar?

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.

What is Quantitative Tightening and how does it influence the 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.

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