Fed bets and Iran risks lift US Dollar Index (DXY) above 103.00 to highest level since April 2025

• DXY adds to its inflation-driven gains as markets strengthen bets on further Fed rate hikes.
• Support for the USD persists as the US-Iran confrontation sustains the geopolitical risk premium.
• Further gains appear to be the more likely direction given the fundamental backdrop.

Dollar bulls are seeking to extend gains beyond 103.00 after the US Dollar Index (DXY) reached its highest level since April 2025 in Thursday’s Asian session. The index measures the Greenback against a basket of currencies.

Support for the DXY has come from rising US bond yields, with the benchmark 10-year US government bond yield moving back above 5% on Wednesday. Traders have begun factoring in the possibility of an outsized 50-basis-point (bps) Fed rate hike in December. These expectations followed stronger-than-forecast US consumer inflation figures for October, after which several Federal Reserve (Fed) officials struck a more hawkish tone, reinforcing market bets on additional policy tightening.

How does Waller’s hawkish shift strengthen Fed tightening bets and the Dollar?

A clear preference for further tightening emerged from Fed’s Waller, whose notably more hawkish remarks earned an FXS Speechtracker score of 9/10, substantially above the historical average of 7.3/10. He indicated conditional openness to a half-point rate increase in December if core CPI comes in at 0.3% or higher, while backing at least a quarter-point rise even if the data improve. This stance points to a strong policy response to persistent inflation and widespread price pressures. His emphasis on policy being less restrictive than previously believed, and on the need for real rates to increase to preserve tight conditions, strengthens upside risks for US yields and the Dollar.

Moving further into hawkish territory, the FXS Fed Sentiment Index gained 3.17 points to reach 145.50, comfortably above the neutral threshold of 100 and consistent with the high FXS Speechtracker score. Together, the firmer index reading and the more hawkish-than-usual speech tone suggest that markets should assign greater odds to further Fed rate increases. That could lend support to the Dollar against the Euro and Yen.

Geopolitical risks also continue to command a premium as the US and Iran remain at odds over the Strait of Hormuz, alongside fresh US strikes on Iran’s Qeshm Island. Iran has also targeted ship navigation systems on Didamar, an Omani island at the entrance to the Persian Gulf. In addition, Iranian Armed Forces Deputy Chief of Staff Brigadier General Kioumars Heidari said the strategic waterway would open only on the orders of the leader of the revolution.

Hopes of a diplomatic settlement to the US-Iran conflict have weakened following these developments, providing another source of support for the safe-haven US Dollar (USD). The balance of risks therefore continues to favour further DXY gains. Attention now turns to the Weekly Initial Jobless Claims release. Alongside remarks from influential FOMC members and further geopolitical news, the data should offer meaningful direction to the index.

What does the DXY 4-hour chart indicate?

Can the technical outlook support further gains?

The near-term outlook for DXY remains bullish after the previous day’s breakout above horizontal resistance at 102.40-102.50. Holding comfortably above the 200-period Exponential Moving Average (EMA) on the 4-hour chart adds to the positive technical picture. Should a significant correction develop, the 200-period EMA near 101.55 could provide initial support, with buyers expected to defend the broader uptrend at that level.

(The technical analysis of this story was written with the help of an AI tool. Know more.)