US Dollar Index (DXY) nears 10-month highs amid Middle East tensions

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The US Dollar Index (DXY), which measures the Greenback's value against a basket of six major currencies, extends its advance on Friday and is set for a second consecutive weekly gain amid escalating Middle East tensions, which continue to boost demand for the US Dollar (USD).

US Dollar Index rises toward May 2025 highs as Middle East tensions boost demand for the Greenback.
Oil supply risks through the Strait of Hormuz push crude prices higher, fueling inflation concerns.
Fading Fed rate-cut bets lift US Treasury yields and support the US Dollar.

At the time of writing, the index trades near 100.32, hovering close to levels last seen in May 2025.

The USD’s advance is being driven by a mix of near-term factors tied to the ongoing US-Iran war. Rising geopolitical uncertainty has prompted investors to rotate back into the Greenback, with flows shifting out of several G10 currencies as traders seek liquidity and safety during periods of market stress, reflecting the Dollar’s status as the world’s primary reserve currency.

At the same time, supply disruptions through the Strait of Hormuz have pushed Oil prices higher. Since global crude trade is largely priced in US Dollars, rising energy costs can indirectly boost demand for the Greenback.

Elevated Oil prices are also fueling inflation fears, which could force the Federal Reserve (Fed) to delay interest rate cuts and keep borrowing costs higher for longer. Traders are now pricing in only about 20 basis points of easing by December, according to Bloomberg, marking a sharp shift from earlier expectations of more than 50 basis points of rate cuts before the US-Iran conflict.

Fading rate-cut bets have pushed US Treasury yields higher, offering additional support to the US Dollar. Still, signs of labor market cooling continue to cloud the policy outlook, with traders looking ahead to next week’s Fed monetary policy meeting for fresh guidance, including the updated dot plot and Summary of Economic Projections (SEP).

Despite the renewed demand, structural headwinds for the US Dollar persist. President Donald Trump’s aggressive trade policies, concerns about political pressure on the Fed's independence, rising US government debt and growing worries about the US fiscal outlook keep the broader debasement narrative alive.

US Dollar FAQs

What is the US Dollar?

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

How do the decisions of the Federal Reserve impact the US Dollar?

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

What is Quantitative Easing and how does it influence the US Dollar?

In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

What is Quantitative Tightening and how does it influence the US Dollar?

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.