US Dollar Index hits more than one-month highs on Iran tensions and hawkish Fed bets

• The US Dollar Index climbs near more than one-month highs as stalled US-Iran negotiations support the Greenback.
• Rising Oil prices and Strait of Hormuz disruptions reinforce expectations of a Fed rate hike by year-end.
• Hawkish Fed repricing pushes US Treasury yields to multi-month highs, providing additional support to the US Dollar.

The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, extends its rally on Tuesday, climbing near more than one-month highs as stalled US-Iran negotiations and hawkish Federal Reserve (Fed) expectations support the US Dollar. At the time of writing, the index is trading around 99.33, up nearly 0.35% on the day.

With no clear end in sight to the Middle East conflict and the Strait of Hormuz remaining largely closed, traders are increasingly pricing in the possibility of a Fed rate hike by year-end as rising Oil prices continue to fuel inflation concerns. According to the CME FedWatch Tool, markets are now pricing in nearly a 35% probability of a 25 basis point (bps) rate hike at the October meeting, rising to around 42% for the December meeting.

The hawkish repricing continues to push US Treasury yields sharply higher, providing additional support to the Greenback. On Tuesday, the benchmark US 10-year Treasury yield climbed to a 16-month high near 4.687%, while the US 30-year Treasury yield rose to around 5.197%, its highest level since July 2007.

Meanwhile, traders continue to monitor developments in the US-Iran talks, as indirect negotiations remain stalled over disagreements surrounding Iran’s nuclear programme.

US President Donald Trump said on Tuesday that military action against Iran could still resume if talks fail, adding that “we may have to give Iran another hit.” Trump said the United States was giving Iran a limited timeframe for negotiations, suggesting a decision on possible military action could come within the next two to three days or by early next week.

The remarks came just one day after Trump said he had halted an immediate planned military attack on Iran following requests from Gulf leaders to allow peace negotiations to continue.

Meanwhile, Iran’s Deputy Foreign Minister Kazem Gharibabadi said Tehran remains prepared to confront any military aggression, accusing Washington of presenting threats as an “opportunity for peace.”

On the data front, the US economic calendar remains relatively light this week, though the latest ADP Employment Change 4-week average rose to 42.25K from 33K previously. Traders now await the release of the Fed meeting minutes on Wednesday, preliminary May Purchasing Managers Index (PMI) data on Thursday and the University of Michigan Consumer Sentiment survey on Friday for fresh clues on the Fed’s policy outlook.