The Dollar Index (DXY) continued its rebound during Tuesday's Asian trading session, climbing back near 99.10 after a brief pullback. The market's reassessment of the Middle East situation, the Federal Reserve's policy path, and global risk sentiment is currently fueling renewed safe-haven demand for the US dollar.
Recent negotiations between the United States and Iran concerning a ceasefire and the reopening of the Strait of Hormuz have remained a focal point for global financial markets. Earlier, US President Trump stated that the talks were "progressing well," leading markets to anticipate a potential easing of tensions in the Middle East, which briefly reduced safe-haven demand for the dollar.
However, the situation has since become volatile again. On Monday, the US military conducted what it described as a "defensive strike" in southern Iran, targeting missile launch facilities. US Central Command stated that forces would exercise restraint during the ceasefire but emphasized the continued protection of US troops and maritime security in the region. This news quickly heightened market risk aversion. As the Strait of Hormuz handles approximately 20% of global seaborne crude oil shipments, investors fear any new military conflict could disrupt global energy supplies and further push up international oil prices. Against this backdrop of rising global risk aversion, the US dollar, as the world's core safe-haven currency, has regained favor among investors. The Dollar Index had previously fallen to a more than one-week low, but with the market reassessing Middle East risks, capital has flowed back into the dollar and US Treasury markets, driving the index higher.
Beyond safe-haven demand, shifting expectations regarding Federal Reserve monetary policy are also supporting the dollar. Recent US inflation data has remained elevated, and rising international energy prices due to Middle East tensions have sparked concerns that energy-driven inflation risks could push up overall US price levels again. The market widely believes the Federal Reserve may need to maintain a high-interest-rate environment for a longer period to control potential inflationary pressures. According to the CME FedWatch Tool, the market has begun pricing in a roughly 41% probability of another 25-basis-point rate hike by the Fed this year. This expectation is keeping US Treasury yields elevated and further enhancing the dollar's appeal. The high-interest-rate environment not only increases the yield on dollar-denominated assets but also attracts continued global capital flows into US markets.
Market focus is now shifting to the upcoming US Personal Consumption Expenditures (PCE) Price Index data. As one of the Federal Reserve's preferred core inflation gauges, the PCE data will directly influence market expectations for future policy. If the PCE data indicates US inflation remains higher than expected, markets may strengthen expectations for the Fed to maintain a hawkish stance, potentially driving the dollar further higher. Conversely, if inflation shows clear signs of cooling, it could dampen the dollar's short-term rally.
Simultaneously, the Middle East situation remains a significant variable affecting the dollar. Although US-Iran negotiations continue, clear differences persist on key issues such as maritime security in the Strait of Hormuz and Iran's nuclear program. The market believes that as long as Middle East tensions are not fully resolved, safe-haven demand for the dollar is unlikely to dissipate completely. Furthermore, sustained high international oil prices could reinforce concerns about inflation risks.
From a daily chart perspective, the Dollar Index, having found support near 97.80, has been on a sustained rebound and has now climbed back above the 99 level. On the daily timeframe, the 20-day moving average is beginning to flatten, and the MACD indicator is moving back near the zero line, suggesting bearish pressure is weakening. Key resistance levels above are located around 99.50 and the 100.20 area. A decisive break above the 100 level could open the door for further gains, while key support below lies near 98.60 and 97.90.
If upcoming US PCE data continues to show strength, the Dollar Index could test the 100 level further. However, if Middle East tensions ease significantly and US inflation data cools, the dollar may re-enter a phase of consolidation at high levels. Overall, the current movement of the Dollar Index is primarily driven by three factors: safe-haven demand, expectations for sustained high Fed interest rates, and global energy risks. Short-term market volatility is likely to remain elevated.