Middle East tensions combined with the Fed's hawkish stance boost safe-haven demand, US dollar index continues bullish consolidation

Reuters Finance APP News — On Monday during European hours, the US dollar index remained strong, currently trading around 99.65. Driven by escalating geopolitical risks and hawkish policy expectations, the dollar has shown strong resilience overall, with market risk aversion clearly increasing.

From a fundamental perspective, ongoing tensions in the Middle East have become a key factor supporting the dollar’s strength. Market surveys indicate that the US has issued tough signals, demanding the reopening of critical energy routes, or else taking further action. Iran responded that once such actions are implemented, countermeasures including closing key energy transportation channels will be taken. The Strait of Hormuz accounts for about 20% of global oil shipping, and the potential risks have significantly heightened concerns over energy supply disruptions.

Against this backdrop, energy prices have surged rapidly, further boosting global inflation expectations. This “imported inflation” pressure has led markets to reassess the Federal Reserve’s policy path. Although markets previously expected room for rate cuts in the future, the current environment sees heightened expectations of maintaining high interest rates or even tightening further. Rising inflation expectations resonate with sustained high rates, providing solid support for the dollar.

Joseph Capurso, Head of International Economics at the Commonwealth Bank of Australia, stated: “If markets start to price in a new round of US tightening, the dollar will strengthen significantly against all currencies.”

From market performance, the dollar, as the world’s main safe-haven currency, is usually favored during risk events. Current geopolitical uncertainties not only push energy prices higher but also prompt capital to flow back into dollar assets, further strengthening the dollar index.

From a technical perspective, on the daily chart, the dollar index found support near the 98 level and has rebounded. It has now regained above the short-term moving averages and is testing resistance near the 100 mark (bolded). The overall structure shows a oscillating upward trend; if it breaks through this level, it could further rise toward the 101-102 range. Regarding momentum indicators, RSI is gradually rising into the neutral to slightly bullish zone, indicating increasing bullish momentum.

On the 4-hour chart, the dollar index shows a clear upward channel, with short-term moving averages aligned bullishly, and prices moving along the upper Bollinger Band, indicating short-term strength. The MACD is above zero, with the momentum histogram expanding, suggesting the uptrend is still intact. However, if a short-term rally fails to effectively break the 100 level, a technical correction may occur, with support levels at 99 and 98.50.

Looking ahead, the market will focus on the upcoming release of the US March S&P Global Manufacturing PMI preliminary data. If the data underperforms expectations, it could weaken confidence in the resilience of the US economy and exert some pressure on the dollar; conversely, strong data could further reinforce the dollar’s upward momentum.

Editor’s Summary:

The current rise in the dollar index is mainly driven by geopolitical risks and policy expectations, with safe-haven demand and high interest rates providing dual support. In the short term, the dollar still has upward potential, but traders should watch out for volatility caused by key data releases. In the medium to long term, the dollar’s trajectory will depend on inflation trends and the pace of Fed policy adjustments. Amid multiple uncertainties, market volatility may continue to intensify, and investors should stay flexible.

(Edited by: Wang Zhiqiang HF013)

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