United States Dollar Index softens to near 99.00 amid US-Iran conflict risks

The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, currently trades near 99.10 during the early European trading hours on Wednesday. The DXY trades with mild losses as traders weigh the risks of a renewed flare-up in the Iran war.

Reuters reported on Tuesday that Iranian officials said the US had violated a ceasefire by attacking targets near the contested Strait of Hormuz, potentially complicating efforts to bring the war to a close. Iranian Supreme Leader Mojtaba Khamenei said that Gulf powers will no longer be a shield for US bases, and the US will no longer have a safe haven in the region. 

Traders will closely monitor the developments surrounding the US-Iran peace deal. US President Donald Trump stated early Tuesday that negotiations with Iran to extend their ceasefire and reopen the crucial waterway are proceeding. However, uncertainty remains high as disputes over language concerning Iran’s nuclear program and sanctions have held up a deal.

A hawkish shift in interest rate hike expectations, driven by rising oil prices, could underpin the DXY in the near term. Traders are now pricing in nearly a 39.0% probability that the Federal Reserve (Fed) will raise interest rates by 25 basis points (bps) by year-end, according to the CME FedWatch tool.

The US April Personal Consumption Expenditures (PCE) Price Index report will take center stage later on Thursday. If the report shows hotter-than-expected inflation outcomes, this could lift the USD against its rivals.