- The US Dollar is outperforming on Friday as investors rush for safety.
- Fears of a full-blown Israel-Iran war have boosted demand for safe-haven assets and the US Dollar.
- The broader trend, however, remains bearish with long-term lows, at 0.8045, still at a short distance.
The US Dollar is trimming losses after a sharp decline on Thursday. The risk-averse reaction to Israel’s attack on Iran has brought some life to the US Dollar, pushing the pair back above 0.8100, but still on track to a 1.3% weekly decline.
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News reports talk about explosions in nuclear and military sites in Iran that would have killed some high-ranking Revolutionary Guard figures in an attack that, according to Israeli Prime Minister Benjamin Netanyahu, might extend to several days.
Iran announced that it will abandon the nuclear talks with the US, which were taking place on Sunday in Oman, and launched a drone attack on Israel, which is being intercepted by the Israeli army.
These events have increased concerns about a regional war in the area, which would add a layer of uncertainty to an already gloomy global economic outlook, after Trump threatened to impose unilateral tariffs on all trading partners if they don’t abide to a series of demands that will be sent by main in the coming days.
The US Dollar has been the best beneficiary of the risk-averse sentiment. The USD/CHF pair is trimming losses after having reached levels right above a 14-year low, at 0.8045. The broader trend, however, remains bearish, with Swiss Franc downside attempts likely to be limited in risk-off markets.
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.
