United States Dollar Index weakens to near 101.00 despite mounting Middle East tensions

• US Dollar Index softens to around 101.15 in Wednesday’s Asian session. 
• Market expectations point to unchanged Fed policy next week, with Fed funds futures pricing in nearly a 74.9% chance. 
• Houthi rebels threatened to open a front in the widening Middle East conflict.

The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, currently trades near 101.15 in the Asian trading hours on Wednesday. The DXY declines amid US Federal Reserve (Fed) rate uncertainty. Traders continue to weigh escalations in the US-Iran war, which could shape monetary policy trajectories.

Softer US inflation data might lower the possibility of a US rate hike later this year, weighing on the US Dollar against its rivals. Markets continue to anticipate no change to rates at the Fed’s next meeting on July 29, with Fed funds futures pricing an implied 74.9% chance of a hold, compared to a 61.5% odds a month ago, according to the CME FedWatch tool.

On the other hand, escalating conflict between the US and Iran could boost the DXY as a safe-haven asset. The US military has launched an 11th consecutive night of strikes against Iran, with explosions reported in northwestern Iran’s Tabriz region.

Additionally, Yemen’s Houthis threaten to close Bab el-Mandeb, raising fears of wider conflict, further disrupting global oil supplies and international trade. Bab el-Mandeb is a vital shipping chokepoint, connecting the Red Sea to the Gulf of Arabia.

“A continuation of the Middle East conflict should support the dollar because of its safe-haven status and typically positive correlation with oil prices,” said Commonwealth Bank of Australia currency strategist Samara Hammoud.