United States Dollar Index declines despite rising safe-haven demand, Fed rate hike odds

• US Dollar Index may regain ground as escalating Middle East tensions drive safe-haven demand.
• CENTCOM announced precision strikes on Iranian targets, noting over 50,000 US service members are deployed across the Middle East.
• The CME FedWatch Tool shows a 51% chance of a September Fed rate hike versus a 23% hold probability.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is losing ground after two days of gains and is trading around 101.20 during the Asian session on Tuesday.

However, the downside of the Greenback could be limited amid rising safe-haven demand due to escalating Middle East tensions. US Central Command (CENTCOM) announced new precision strikes on Iranian military targets, noting that over 50,000 US service members are currently deployed across the Middle East. Meanwhile, Iran’s IRGC stated that two “offending supertankers” were disabled in the Strait of Hormuz after ignoring warnings and using a mined route. Iran warned that cooperating with the US would delay the waterway’s reopening and trigger a global energy crisis.

Hormuz tensions drive oil prices higher, stoking fears that energy-driven inflation will force the Federal Reserve (Fed) to keep interest rates elevated. Market expectations have shifted rapidly in response, with the CME FedWatch Tool now showing a 51% probability of a Fed rate hike in September, compared to just a 23% chance that rates will stay on hold.

Traders await Tuesday’s US June Consumer Price Index (CPI) report, where analysts anticipate a divergence between a 0.1% month-on-month decline in headline inflation and a sticky 0.3% increase in the core reading.

Also, Federal Reserve Chair Kevin Warsh will deliver highly anticipated congressional testimony, a session that traders will dissect word by word for hints on whether the central bank will validate the market’s growing hawkishness.