The USD/JPY pair ticks lower to near 159.60 during the European trading session on Tuesday. The pair is marginally lower as the US Dollar (USD) trades subduedly, following the release of the Wall Street Journal (WSJ) report, which shows that United States (US) President Donald Trump is willing to end the war with Iran despite the Strait of Hormuz remaining closed.
The WSJ report showed that US President Trump doesn’t intend to extend the conflict beyond the set timeline of four to six weeks, and has damaged Tehran’s navy and missile infrastructure significantly.
During the press time, S&P 500 futures trade significantly higher as fresh de-escalation in Middle East conflicts has improved the market sentiment. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, is almost flat around 100.45.
Amid improving investors’ risk appetite, the US Dollar has not faced intense selling pressure as oil prices are expected to remain higher due to Iran’s continuous military dominance on the Strait of Hormuz, a scenario that will keep global inflation projections elevated.
Traders have already priced out the hopes of two interest rate cuts by the Fed this year after the Middle East war started.
Meanwhile, the Japanese Yen (JPY) trades broadly firm amid hopes that the Bank of Japan (BoJ) will continue raising interest rates. The BoJ Summary of Opinions of the March policy meeting, released on Monday, showed that several policymakers were confident of interest rate hikes in the near term.
“One member said the BoJ must raise policy rate without hesitation if there are no signs of significant deterioration in the economic environment, wave-setting stance of small and midsized firms,” BoJ Summary of Opinions showed.
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.
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