Dollar Index Holds Near 100

The dollar index was around 100 on Monday, easing slightly from ten-month highs reached last week, as traders continue to assess the conflict with Iran and its impact on inflation and the fiscal outlook. Oil prices eased after Treasury Secretary Bessent said the US is allowing Iranian oil tankers to transit the Strait of Hormuz, while President Trump is urging other nations to help ensure the waterway remains open. Still, uncertainty persists over when the conflict could end. The US says it is in talks with Iran, although Tehran has denied claims that it is seeking a truce. Meanwhile, the Fed will announce its monetary policy decision later this week. While no change to the federal funds rate is expected, investors will closely watch policymakers’ assessment of the recent spike in energy prices and its impact on inflation and borrowing costs. Markets are currently pricing in only one 25bps rate cut, likely not before December. The greenback was mostly lower against the Aussie.

The dollar index fell toward 100 on Monday, trimming last week’s gains as reports that the US will soon announce a coalition of countries to escort ships through the Strait of Hormuz reduced demand for the safe-haven currency. Markets are also weighing the potential for US-Iran negotiations as the Middle East conflict entered its third week. Oil prices stabilized despite US attacks on military targets at Iran’s main oil-export hub of Kharg Island over the weekend and threats to strike energy infrastructure if Tehran interferes with Strait of Hormuz transit. Still, the dollar index remained near its highest levels in ten months as rising energy costs fueled inflation concerns, lowering expectations that the Federal Reserve will cut interest rates. The central bank is widely expected to hold rates steady this week in what would be Chair Jerome Powell’s penultimate meeting.

The dollar index climbed above 100.3 on Friday, its highest level since mid-May 2025, and was on track for a second consecutive weekly gain as traders continued to favor the greenback as a safe haven amid the escalating conflict with Iran and the lack of prospects for an imminent resolution. Defense Secretary Pete Hegseth told reporters that the US would carry out its largest wave of strikes yet against Iran on Friday. Oil prices also recovered after an early decline, remaining near their highest levels since 2022. Investors see the US as better positioned than other economies due to its greater energy independence. The Federal Reserve will decide on monetary policy next week and, although no changes to the federal funds rate are expected, markets will closely watch for clues about policymakers’ outlook for the remainder of the year, particularly how inflation may evolve in light of the recent energy rally. Investors are currently pricing in only one rate cut by the Fed in 2026.