United States Dollar Index rebounds toward 100 amid US-Iran, Fed uncertainty

• The US Dollar Index recovers toward 100 as strong US manufacturing data supports the Greenback.
• Markets weigh mixed US-Iran headlines alongside the Fed monetary policy outlook.
• Upcoming US labour data could shape expectations for the Fed’s September decision.

The US Dollar Index (DXY) stages a modest comeback on Monday as stronger-than-expected US manufacturing Purchasing Managers Index (PMI) data and uncertainty over US-Iran talks help the Greenback stabilize following last week’s sell-off, triggered by joint intervention from Washington and Tokyo to support the Japanese Yen (JPY).

At the time of writing, DXY trades around 100, recovering from an intraday low of 99.42, its weakest level since June 15.

The Greenback opened the week on the back foot after US President Donald Trump said over the weekend that he had called off a planned strike on Iran, with negotiations expected to begin on Monday. Sentiment quickly shifted after Iran denied holding talks with Washington.

Later in a post on Truth Social, Trump accused Iran’s leadership of being “duplicitous.” He also claimed that the US Navy controls the Strait of Hormuz and warned that the blockade would stay in place until Iran agrees to a deal or surrenders.

The hardline rhetoric from both sides casts doubt on the prospect of direct talks in the near term, keeping defensive demand for the US Dollar alive. However, uncertainty over the Federal Reserve’s (Fed) monetary policy path could limit the Greenback’s recovery.

Strategists at Brown Brothers Harriman argue that “the USD rally from May has run its course,” with the DXY “poised to retreat back into a 96.00-100.00 range.” While the bank acknowledges that “the tailwind to USD from resilient US economic activity” remains in place, they contend it is being increasingly offset by “Fed Chair Kevin Warsh's failure to turn tough inflation rhetoric into a credible policy,” undermining the policy backdrop that had previously supported the Dollar.

On the data front, the US ISM Manufacturing PMI rose to 55.6 in July from 53.3 in June, beating the market forecast of 54.0 and reaching its highest level since May 2022.

Attention now turns to this week's US labor market data for fresh clues on whether the Fed will raise interest rates in September. The CME FedWatch Tool shows markets pricing in around a 60% chance of a hike.