United States Dollar Index (DXY) eases from July 30 high as Iran offers to reopen Hormuz

DXY struggles to capitalize on a modest intraday move up to a fresh high since July 30.
Easing inflation fears weigh on US bond yields, acting as a headwind for the USD.
The Fed’s hawkish outlook and geopolitical risks could support the safe-haven buck.

The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, retreats slightly after hitting a fresh high since July 30 during the early European session on Tuesday. The index, however, lacks follow-through and currently trades just below mid-100.00s, unchanged for the day.

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

The US Federal Reserve (Fed) last week raised interest rates for the first time in over three years, and the dot plot indicated that officials expect one more hike this year. Furthermore, Boston Fed President Susan Collins and St. Louis Fed President Alberto Musalem explicitly backed the case for further policy tightening as inflation risks remain elevated due to a commodity price shock. Apart from this, geopolitical uncertainties suggest that the path of least resistance for the safe-haven US Dollar (USD) remains to the upside.

In the latest developments, Iran's Islamic Revolutionary Guard Corps (IRGC) warned on Monday that it would change the geography of the war if the US escalates the conflict. Meanwhile, the US is stepping up economic pressure on Iran, warning that Iranian airlines could effectively be shut out of international aviation from September 23. This comes on top of intensifying fighting between the Iran-backed Houthi group in Yemen and Saudi Arabia, which, in turn, validates the near-term positive outlook for the DXY.

Meanwhile, Iran offered to reopen the Strait of Hormuz within seven days if the US lifts its blockade of Iranian ports and halts military operations. The optimism drags crude oil prices to a two-week low, which helps cool immediate inflation fears and keeps US bond yields depressed below multi-year highs. This, in turn, might hold back bulls from placing fresh bets on the DXY, though the supportive fundamental backdrop makes it prudent to wait for strong follow-through selling before confirming that the index has topped out.

DXY daily chart

Technical Analysis

The DXU maintains a bullish near-term bias above the 100-day Simple Moving Average (SMA) at 99.90 and has reclaimed key Fibonacci supports around 100.18 and 99.80. Further up, immediate resistance emerges at the 61.8% Fibo. retracement at 100.56, ahead of a higher barrier at the 78.6% level at 101.10, with the recent swing high at 101.78 defining a stronger cap.

On the downside, initial support is seen at the 50% retracement at 100.18, followed by the 100-day SMA at 99.90 and the 38.2% retracement at 99.80, while deeper structural demand is located at the 23.6% level at 99.33 and the anchor low near 98.58.

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

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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