US Dollar Index surges to five-week highs as Middle East conflict drives safe-haven demand
- The US Dollar Index rallied sharply above 98.00 as risk aversion grips markets following US-Israeli strikes on Iran.
- Joint US-Israeli strikes on Iran killed Supreme Leader Khamenei and triggered retaliatory attacks across the Gulf, with Iran's IRGC effectively closing the Strait of Hormuz to shipping.
The DXY jumped about 0.85% on Monday, surging through the 98.00 level to touch a session high around 98.75, its strongest reading in five weeks. The move marks a decisive breakout from the choppy 95.50 to 98.00 range that had contained price since late January, with Monday's strong bullish candle erasing the indecision that built up over the past two weeks of stalled rallies near 98.00.
Joint US-Israeli military strikes on Iran over the weekend under Operation Epic Fury sent shockwaves through global markets. The killing of Supreme Leader Ayatollah Ali Khamenei and Iran's retaliatory missile and drone attacks on US assets across the Gulf, including in the UAE, Qatar, Bahrain, and Saudi Arabia, triggered a broad flight to safety. The effective closure of the Strait of Hormuz, through which roughly 20% of global oil and gas supplies flow, has compounded the risk-off mood and sent crude prices sharply higher.
On the macro side, the Federal Reserve (Fed) held rates at 3.50% to 3.75% in January, and minutes from that meeting showed several participants discussing the possibility of rate hikes if inflation stays above target. Friday's Producer Price Index (PPI) reinforced that caution, with headline PPI rising 0.5% month-on-month, well above the 0.3% forecast. Money markets have pushed the first fully priced rate cut out to July, with about 50 basis points of total easing priced in by year-end.
DXY daily chart
Technical Analysis
In the daily chart, Dollar Index Spot trades at 98.52. The near-term bias is mildly bullish as price holds above the 50-day exponential moving average and stabilizes after the recent pullback. The short-term average has flattened just under 98.00, indicating emerging support under spot rather than a trending phase. Stochastic has pushed back into overbought territory but without a downturn, signalling sustained upside pressure rather than an imminent reversal.
Initial support is located at the 50-day EMA near 97.90, followed by the recent swing area around 97.60 if sellers regain control. A deeper setback would expose secondary support close to 97.10. On the upside, immediate resistance sits at the recent high near 98.80, with a break above that level opening the way toward the psychological 99.50 region where the descending 200-day EMA is moving and could cap gains.
In the weekly chart, Dollar Index Spot trades at 98.53. The near-term bias is neutral with a slight downside tilt as price holds below the gently descending 200-week exponential moving average near 100.80, underscoring a still-dominant broader downtrend. The latest stochastic bounce from the low-30s toward the mid-40s signals recovering momentum, yet the indicator remains mid-range, indicating limited directional conviction and arguing against a clear bullish reversal at this stage.
Initial resistance aligns near 99.50, where recent weekly highs cluster below the long-term average, with a break above exposing the 100.80 area as the next upside barrier. On the downside, immediate support emerges around 97.75, the prior weekly close, followed by 97.00 as the next level that would come into focus if sellers regain control. A sustained move below 97.00 would reinforce the prevailing longer-term bearish structure, whereas a weekly close above 100.80 is needed to shift the bias toward a more durable upside phase.
(The technical analysis of this story was written with the help of an AI tool.)
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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