US Dollar Index Eases from 15-Month High

The US dollar index was at 101.3, halting the rally that topped at a one-month high of 101.5 on July 23rd, as a slight pullback in energy prices softened growing bets that the Federal Reserve could deliver a rate hike this month. Still, the index remained only 0.3% away from the 15-month high touched late June amid the sustained consensus that the central bank will still deliver a rate hike this year. Energy inflation concerns regained momentum after an escalation to the war between the US and Iran resulted in blockades for energy tankers in the Persian Gulf and Red Sea, lifting oil and fuel prices. The inflationary risks were combined with robust economic data, adding leeway for higher rates. PMI data from the S&P showed that private sector activity grew the most this year. Also, initial unemployment claims fell the most in nearly six decades last week, consolidating the robust momentum of the labor market.

The dollar index traded around 101.3 on Friday, hovering near a three-week high as US President Donald Trump's latest tariffs on major trading partners reinforced concerns over a renewed tariff wall. Under the new framework, imports from countries including Mexico, Canada, the UK, and India will face 10% tariffs linked to alleged forced-labor concerns, while goods from the European Union and Taiwan will be capped at 10%. Products from Japan, South Korea, and Switzerland will generally face duties of up to 12.5%, with additional charges applying to some goods. The greenback also drew support from rising expectations of tighter Federal Reserve policy amid escalating Middle East tensions that have fueled energy prices, as well as resilient US labor market conditions. Swap markets currently assign roughly a 34% chance of a Fed rate increase next week, with at least one hike fully priced in by September and the possibility of another before year-end.

The dollar index appreciated to 101.3 on Thursday, the highest level in about three weeks, as surging oil prices and escalating geopolitical tensions fueled expectations that the Fed will need to raise interest rates. Markets are now pricing in a more than 33% chance of a rate hike next week, while the probability of a September increase has climbed above 78%, up from 61% a day earlier. Hostilities in the Middle East continue to intensify, with no signs of a near-term resolution. As a result, oil prices have surged nearly 31% above their pre-conflict levels seen earlier this month. Although inflationary pressures have remained relatively contained so far, the latest spike in energy prices has renewed concerns that higher oil costs could feed into broader inflation, prompting the Fed to maintain a tighter monetary policy stance. The greenback advanced against the euro after the ECB left interest rates unchanged, as expected, while also posting gains against the yen and the pound.