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

DXY comes under pressure as receding Middle East tensions curb safe-haven buying and lower the likelihood of a December Fed rate hike.
Crude oil prices stabilise on US-Iran peace talks, easing near-term inflation worries.
Dollar declines remain contained as strong US GDP and tight labour market figures point to a resilient economy.

Under pressure for a third consecutive day, the US Dollar Index (DXY) is trading around 101.70 in Friday’s Asian session. The index tracks the US Dollar (USD) against a basket of six major currencies.

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

Reduced demand for safe-haven assets is weighing on the Greenback as hopes build for US-led diplomatic peace talks. With tensions in the Middle East subsiding, concerns over oil supplies and inflation have eased, tempering expectations of an interest rate increase at the Federal Reserve’s (Fed) December meeting. According to the CME FedWatch Tool, traders now assign a nearly 75% probability to a 25-basis-point hike, compared with 84.2% a day earlier.

A Wall Street Journal report on renewed diplomatic efforts 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 to try to resume peace talks. Confirming that he had authorised Vance’s outreach, US President Donald Trump also said Iran requires help with medical supplies and other essential resources.

Recent US economic releases, however, point to ongoing resilience and have strengthened bets on a Fed rate hike. Supported by robust consumer spending growth of 3.8% YoY, preliminary Gross Domestic Product growth came in at 3.4% YoY. This exceeded the 3.2% forecast and improved on the Q2 reading of 2.2%.

Further evidence of a heating economy 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.

Technical Analysis: Can DXY Regain Upward Momentum?

At 101.70 on the daily chart, Dollar Index Spot remains between its 50-day Exponential Moving Average (EMA) below and its nine-day EMA above. That positioning leaves the near-term outlook neutral following the latest retreat from the highs. Momentum appears consistent with consolidation rather than a decisive directional move, with the 14-day Relative Strength Index (RSI) having slipped to 51.47. Meanwhile, a reading of 141.89 on the FXS Fed Sentiment Index points to heightened policy uncertainty, which could constrain sustained trends.

A decisive move above immediate resistance at the 9-day EMA of 101.93 would pave the way for another test of recent highs. Conversely, the first support lies at the 50-day EMA of 101.21. A daily close beneath that threshold 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: What Does the Daily Chart Indicate?

Could a Steeper Treasury Curve Support the Broader USD Outlook?

As investors reconsider the growth outlook and underlying support for the currency, Scotiabank strategists point to the broader USD implications of movements in the Treasury curve. They note that recent “price action in the Treasury curve was notable,” with Chair Warsh’s comments eventually 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 a move “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: Frequently Asked Questions

What Role Does the US Dollar Play?

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

How Does Federal Reserve Policy Affect the US Dollar?

Monetary policy set by the Federal Reserve (Fed) is the single biggest influence on the US Dollar’s value. Achieving price stability by controlling inflation and promoting full employment are the Fed’s two mandates. Adjustments to interest rates are its main means of meeting these 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.

How Does Quantitative Easing Affect the US Dollar?

When conditions become extreme, the Federal Reserve may print additional Dollars and introduce quantitative easing (QE). Through QE, the Fed sharply expands the supply of credit in a financial system that has become stuck. This unconventional policy is used when credit dries up because banks, fearing counterparty defaults, refuse to lend to one another. It serves as a last resort if 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 this approach, the Fed prints additional Dollars to purchase US government bonds, mainly from financial institutions. The US Dollar generally weakens as a result of QE.

How Does Quantitative Tightening Affect the US Dollar?

In the reverse process, known as quantitative tightening (QT), the Federal Reserve ceases bond purchases from financial institutions. It also refrains from reinvesting principal repayments from maturing bonds in fresh purchases. This generally supports the US Dollar.