US-Iran hopes curb safe-haven demand as United States Dollar Index edges lower

DXY retreats as calmer Middle East conditions curb demand for safe havens and cut the odds of a December Fed rate increase.
Crude prices stabilise on US-Iran peace talks, easing near-term inflation worries.
Dollar losses remain contained as strong US GDP and tight labour market figures underline economic resilience.

The US Dollar Index (DXY) trades near 101.70. The gauge, which tracks the US Dollar (USD) against six major currencies, is declining for a third consecutive day during Friday’s Asian session.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

According to the CME FedWatch Tool, traders now assign a nearly 75% probability to a 25-basis-point rate increase, compared with 84.2% a day earlier. Expectations of a Federal Reserve (Fed) hike at its December meeting have weakened as reduced Middle East tensions ease concerns over oil supplies and inflation. Hopes for US-led diplomatic peace talks are also curbing safe-haven demand, putting pressure on the Greenback.

A Wall Street Journal report on efforts to revive peace talks helped crude oil prices remain stable. The report said US Vice President JD Vance contacted Mohsen Rezaei, Secretary of Iran's Supreme National Security Council, on Wednesday. US President Donald Trump confirmed that he had authorised Vance's diplomatic initiative and said Iran needed help with medical supplies and other essential resources.

Against this backdrop, recent US economic releases have reinforced the economy’s resilience and increased bets on a Fed rate rise. Supported by strong consumer spending growth of 3.8% YoY, the preliminary Gross Domestic Product reading reached 3.4% YoY. That exceeded the 3.2% forecast and Q2's 2.2% figure.

Further evidence of an economy heating up and a tight labour market came from initial jobless claims, which edged down to 194K. Meanwhile, the Core PCE Price Index, the Fed’s preferred inflation gauge, increased 3.1% YoY, matching expectations.

101.70: Dollar Index Technical Outlook

At 101.70 on the daily chart, Dollar Index Spot remains between the 50-day Exponential Moving Average (EMA) below and the nine-day EMA above. This leaves the near-term outlook neutral following the recent retreat from the highs. Consolidation, rather than a firm directional move, is indicated by the 14-day Relative Strength Index (RSI), which has slipped to 51.47. At the same time, the FXS Fed Sentiment Index reading of 141.89 points to heightened policy uncertainty that could constrain sustained trends.

The 9-day EMA at 101.93 provides immediate resistance. A convincing break higher would clear the path towards another test of recent peaks. Initial support lies at the 50-day EMA at 101.21. A daily close beneath it would likely restore a more bearish bias as the index begins to fall below its medium-term trend base.

Chart Analysis Dollar Index Spot — US Dollar Index: Daily Price Chart

Treasury Curve Steepening Offers Broader USD Support

As investors reassess the growth outlook and the currency’s underlying support, Scotiabank strategists point to the broader USD implications of the Treasury curve’s recent moves. They note that “price action in the Treasury curve was notable,” with Chair Warsh’s comments ultimately producing “a meaningful steepening in 2s-10s – a powerful signal for growth.” Calling it “a welcome move away from inversion,” they emphasise that it is one “that carries clear implications for the USD more broadly,”

(The technical analysis of this story was written with the help of an AI tool. Know more.)

US Dollar: Key Questions

US Dollar: What Are Its Main Roles?

As the official currency of the United States of America, the US Dollar (USD) also serves as the ‘de facto’ currency in a significant number of other countries, circulating alongside local banknotes. Data from 2022 shows that it accounts for over 88% of global foreign exchange turnover, equivalent to an average of $6.6 trillion in daily transactions, making it the world’s most traded currency. After the Second World War, the USD replaced the British Pound as the global reserve currency. Gold backed the US Dollar for most of its history, until the Bretton Woods Agreement in 1971 brought an end to the Gold Standard.

Federal Reserve Policy: What Drives the US Dollar?

Monetary policy, set by the Federal Reserve (Fed), is the single biggest influence on the US Dollar’s value. The Fed pursues two objectives: stable prices through inflation control, and full employment. Adjusting interest rates is its main means of meeting those objectives. If prices climb too rapidly and inflation exceeds the Fed’s 2% target, the central bank raises rates, supporting the USD. Conversely, inflation below 2% or an excessively high Unemployment Rate may prompt the Fed to cut interest rates, putting pressure on the Greenback.

Quantitative Easing: How Does It Affect the US Dollar?

When conditions become extreme, the Federal Reserve can print additional Dollars and introduce quantitative easing (QE). Through QE, the Fed sharply expands the supply of credit within a financial system that has stalled. This unconventional policy addresses a credit shortage caused by banks refusing to lend to one another for fear of counterparty default. It is a last resort when interest rate cuts alone are unlikely to deliver the required outcome. During the Great Financial Crisis in 2008, QE was the Fed’s preferred response to the credit crunch. Under the programme, newly printed Dollars are used to purchase US government bonds, mainly from financial institutions. The US Dollar typically weakens as a result of QE.

Quantitative Tightening: What Does It Mean for the US Dollar?

Reversing that process, quantitative tightening (QT) involves the Federal Reserve halting bond purchases from financial institutions. It also stops reinvesting the principal repaid on maturing bonds in new purchases. This policy generally supports the US Dollar.