- The US Dollar Index extends its rally as Middle East tensions intensify.
- Oil supply disruptions keep inflation concerns elevated as growth risks emerge.
- Interest rate outlook shifts as traders pare back Fed rate hike expectations.
The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, extends its advance on Monday, climbing back toward the ten-month highs reached earlier this month as demand for the US Dollar (USD) remains firm amid escalating tensions in the Middle East.
At the time of writing, the index trades near 100.50, remaining on the front foot for a fifth consecutive day.
The US-Israel war with Iran shows no signs of easing despite reports of ongoing negotiations, with Iran-backed Houthi forces now joining the conflict, raising fears of a broader regional escalation.
At the same time, reports suggest the Pentagon is preparing for weeks of ground operations in Iran, with thousands of US troops being deployed to the region, signaling the risk of a prolonged conflict.
US President Donald Trump said on Monday that “great progress” has been made in talks with Iran and that a deal will “probably” be reached. He warned, however, that the US would “completely obliterate” Iran’s power infrastructure, oil wells and Kharg Island if negotiations fail, adding that Washington is in serious discussions with a “new and more reasonable” regime to end military operations.
As the conflict widens, Oil supply disruptions remain in focus, with rising prices feeding into inflation concerns. However, markets are increasingly shifting their focus toward risks to economic growth.
Since the US-Iran war erupted, rate expectations have shifted sharply. Oil-driven inflation initially led markets to price in potential Federal Reserve (Fed) rate hikes, but rising growth concerns are now prompting traders to scale back those bets, driving a pullback in US Treasury yields on Monday.
According to the CME FedWatch Tool, markets now expect the Fed to keep interest rates steady at 3.50%-3.75% through 2026.
Fed Chair Jerome Powell said on Monday that policy is “in a good place” to wait and assess how the current situation unfolds, noting uncertainty around the economic impact. He reaffirmed that the Fed remains committed to bringing inflation back to its 2% target on a sustained basis.
Looking ahead, markets will focus on upcoming US economic data, including the Manufacturing Purchasing Managers’ Index (PMI) and the Nonfarm Payrolls (NFP) report later this week.
