US Dollar Index (DXY) consolidates above 99.50; Middle East tensions remain supportive

The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, kicks off the new week on a positive note, though it lacks follow-through and remains below Friday's swing high. The index currently trades around the 99.65 region, up 0.15% for the day.

The global risk sentiment remains fragile on the back of a further escalation of tensions in the Middle East, which, in turn, is seen as a key factor that continues to underpin the US Dollar's (USD) status as the global reserve currency. In the latest developments, US President Donald Trump issued a 48-hour deadline for Iran to reopen the Strait of Hormuz and threatened to target Iran's energy infrastructure if the demand is not met.

Iran responded by threatening to escalate strikes on energy infrastructure and target critical water desalination facilities across the Middle East, should Trump make good on a promise to “obliterate” the country’s power plants. This remains supportive of elevated Crude Oil prices, fueling inflationary concerns and forcing investors to dial back expectations for rate cuts by the US Federal Reserve (Fed) in 2026. This further supports the USD.

Meanwhile, the US central bank last week projected one rate reduction this year. In contrast, major central banks around the world signaled the potential for rate hikes to quell renewed inflationary pressures. This, in turn, is holding back the USD bulls from placing aggressive bets and acting as a headwind for the DXY. The mixed fundamental backdrop, however, warrants some caution before positioning for a firm near-term direction.