US Dollar Index gains as US-Iran tensions escalate, Treasury yields rise

• The US Dollar Index rebounds on Tuesday, erasing Monday's losses as hawkish Fed bets and rising yields drive demand.
• Fresh US-Iran military strikes lift Oil prices and add a safe-haven bid to the Greenback, while intensifying inflation concerns.
• Traders await US employment data later this week.

The US Dollar Index (DXY) edges higher on Tuesday, reversing all of the previous day’s losses as hawkish Federal Reserve (Fed) expectations and rising US Treasury yields provide a strong tailwind. At the same time, fresh fighting between the United States (US) and Iran drives some safe-haven flows toward the Greenback. At the time of writing, DXY trades around 99.71, up roughly 0.30% on the day.

Reuters reported that the US military began striking Islamic Revolutionary Guard Corps (IRGC) targets inside Iran at 16:00 GMT on Tuesday. Iranian media reported explosions on Qeshm Island and in the southern cities of Bandar Abbas and Chabahar.

US President Donald Trump confirmed the operation in a Truth Social post, saying that the US was “striking Iranian targets near the Strait of Hormuz.” Trump warned that “if the failed Nation of Iran retaliates,” it would be “hit again at a much harder and higher level.”

Oil prices moved higher in reaction to the latest escalation, with West Texas Intermediate (WTI) climbing to its highest level since July 24 and trading around $88.70 per barrel. Higher energy prices add to inflation risks at a time when the Fed is already struggling to bring inflation sustainably back toward its 2% target.

Fed Chair Kevin Warsh’s tough rhetoric at the Jackson Hole Symposium revived expectations of an interest rate hike as soon as this month. Warsh warned that the central bank would have more work to do if policymakers were not confident that inflation was returning to target.

US Treasury yields rise as persistent inflation concerns and hawkish Fed expectations fuel bets on higher borrowing costs, with the benchmark 10-year yield trading around 4.80%, its highest level since January 2025.

According to the CME FedWatch Tool, traders see around a 68% probability that the Fed will raise borrowing costs at its September 15-16 meeting, up from roughly 40% a week ago.

Softer US data provide little relief to Dollar bears

Softer-than-expected US economic data released on Tuesday briefly weighed on the Greenback but failed to generate sustained selling pressure. The ISM Manufacturing Purchasing Managers Index (PMI) fell to 54.6 in August from 55.6 in July, missing the market forecast of 55.2. JOLTS Job Openings rose to 7.271 million in July from 7.182 million but fell short of the 7.3 million forecast.

Attention now shifts to the ADP Employment Change report on Wednesday and the Nonfarm Payrolls (NFP) report on Friday. Strong employment figures could reinforce expectations of a September rate hike, while a weak report may challenge the Greenback’s advance.