Dollar Index Retreats as Market Price in Low Rate Cut Chance
The dollar index (DXY) moved back below 100 after reaching 100.5 early in the session, as traders assessed the latest developments in the Middle East.
Optimism that the Middle East war would end shortly pared back the dollar’s gains. The futures market is again pricing in a lower chance of a US Fed funds rate cut this year.
Forex market data indicated that the Dollar Index settled last week above 100.00 for the second consecutive week. The high since the war began was recorded near 100.65, its best level since last May.
The momentum indicators did not confirm the high, but the risk of war escalation seems to limit selling interest. A report that Iran is drafting a protocol with Oman to monitor traffic through the Strait of Hormuz offered some relief.
However, volatility is expected to persist amid escalating rhetoric from President Trump and as crude prices remain near 2022 highs. Oil prices surged following Trump’s pledge to take more aggressive action against Iran.
High energy prices are fuelling worries about an inflation spiral which could prompt the Fed to adopt a more hawkish stance.
Earlier this week, Fed Chair Powell said officials may need to respond to the economic effects of the conflict, though not at this stage, adding that current policy is well positioned to allow a wait-and-see approach.
Markets currently expect the Fed to keep the federal funds rate unchanged this year. The greenback was mostly higher against the British pound, the Australian dollar and the euro. Emerging Markets to Face Middle East War Repercussions – S&P
