• The US Dollar Index gains as escalating US-Iran tensions boost demand for the Greenback.
• Trump rejects talks with Iran and warns of further strikes on nuclear-linked sites.
• Rising Oil prices keep pressure on the Fed to maintain a restrictive policy stance.

The US Dollar Index (DXY) extends its gains on Tuesday as renewed tensions between the United States and Iran show no signs of easing, boosting demand for the safe-haven Greenback.

At the time of writing, the index, which tracks the Greenback’s value against a basket of six major currencies, trades around 101.18, near one-week highs.

US President Donald Trump maintained a hard-line stance during a White House press conference on Tuesday, dampening hopes for a diplomatic breakthrough. Trump said Iran wanted to meet but that he had “no interest” in talks until Tehran was ready. He also warned that the US would target any site linked to Iran’s nuclear program and threatened heavy strikes on the Pickaxe Mountain area.

Trump’s remarks came as the US military carried out a tenth consecutive night of strikes against Iran on Monday, while Tehran launched attacks on US military assets across the region.

Dollar upside risk builds as Middle East tensions threaten oil and FX carry

Analysts at ING warn that "Dollar risks remain skewed to the upside today as markets continue to display a risky degree of complacency towards the military re-escalation," adding that "a move back to 101.50 in DXY looks entirely consistent with the current backdrop."

OCBC notes that "a larger escalation could revive fears of a prolonged supply shock and drive oil prices back above USD100/bbl," pointing out that "for perspective, Brent crude reached USD126/bbl in late April, around 40% above current levels." In their view, "such an outcome would likely trigger higher market volatility, erode the appeal of FX carry trades, and support a renewed USD rally."

Oil-driven inflation risks reinforce Fed’s tighter-for-longer stance

The rebound in Oil prices is rekindling inflation concerns and supporting expectations that the Federal Reserve (Fed) will maintain a tighter monetary policy stance or even raise interest rates as the central bank seeks to bring inflation back to its 2% target.

A Reuters poll released on Tuesday showed that all 104 economists expect the Fed to hold its benchmark rate at 3.50%-3.75% at its July 28-29 meeting, while 78 forecast no change through year-end.

Of the 67 economists who answered a separate question, 44 said the risk of a rate hike was high, a notable shift from last month, when 47 of 86 respondents viewed the risk as low.