The US Dollar Index (DXY), which measures the value of the US Dollar against a basket of six major currencies, extended its advance on Monday, trading near 100.50 and approaching ten-month highs reached earlier this month. This marks the fifth consecutive day of gains for the index, driven by firm demand for the US Dollar amid escalating tensions in the Middle East [1].
The ongoing US-Israel conflict with Iran has intensified, with Iran-backed Houthi forces joining the fray and raising fears of broader regional escalation. Reports indicate the Pentagon is preparing for weeks of ground operations in Iran, deploying thousands of US troops to the region, signaling the risk of a prolonged conflict [1]. US President Donald Trump stated on Monday that "great progress" has been made in talks with Iran and that a deal will "probably" be reached. However, he warned that the US would "completely obliterate" Iran’s power infrastructure, oil wells, and Kharg Island if negotiations fail, and mentioned discussions with a "new and more reasonable" regime to end military operations [1].
As the conflict widens, oil supply disruptions remain a concern, with rising prices feeding into inflation worries. However, markets are increasingly shifting focus toward risks to economic growth. Since the US-Iran war erupted, rate expectations have changed 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, resulting in a pullback in US Treasury yields on Monday [1].
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 commented that policy is "in a good place" to wait and assess the situation, noting uncertainty around the economic impact and reaffirming the Fed’s commitment to bringing inflation back to its 2% target on a sustained basis [1]. 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 [1].
CONCLUSION
The US Dollar Index continues to strengthen as geopolitical tensions and shifting Fed rate expectations drive market sentiment. While inflation concerns persist due to oil supply disruptions, traders are now more focused on economic growth risks and anticipate steady Fed policy. Upcoming US economic data will be closely watched for further market direction.