The US Dollar Index (DXY) traded within a narrow range during the Asian session on Thursday, hovering around 100.50, close to the near four-week low touched in the previous session.
With the latest US inflation data showing consecutive signs of cooling, market expectations for the Federal Reserve to tighten monetary policy in the near term have diminished further, putting overall pressure on the greenback. However, escalating geopolitical tensions in the Middle East continue to provide some safe-haven support for the currency.
Data released by the US Bureau of Labor Statistics showed that the US Producer Price Index (PPI) for June fell by 0.3% month-on-month, significantly lower than the revised 0.6% growth in the previous month. The year-on-year growth rate slowed to 5.5%, also below market expectations.
This follows the earlier release of the US Consumer Price Index (CPI) for June, which also indicated a further easing of inflationary pressures.
The cooling of these two key inflation indicators has significantly reduced market expectations for the Federal Reserve to continue raising interest rates.
Following the inflation data release, investors have increased their bets that the Fed will keep interest rates unchanged at its July policy meeting, putting further pressure on the dollar.
The market believes that if US inflation continues to improve in the coming months, the Fed will have more room to maintain a wait-and-see policy, thereby eroding the dollar's interest rate advantage.
However, dollar bears have not significantly increased their positions, partly due to renewed escalation in the Middle East.
The US and Iran have engaged in a new round of military actions this week, with both sides conducting strikes, raising regional security risks.
Market surveys indicate that the US has again conducted airstrikes against Iranian missile and drone-related facilities, while Iran has retaliated against regional military targets associated with the US, further intensifying regional tensions.
In addition, the US President stated that if the situation continues to deteriorate, further actions targeting key Iranian infrastructure are not off the table.
Simultaneously, security risks for shipping near the Strait of Hormuz and the Bab el-Mandeb Strait continue to rise, raising market concerns about potential disruptions to global energy transportation.
The Strait of Hormuz handles approximately 20% of the world's seaborne crude oil shipments; any disruption could push international energy prices higher.
Rising energy prices could reignite global inflationary pressures, increasing the likelihood that major central banks will maintain higher interest rates for longer.
The market still expects at least one more 25-basis-point interest rate hike from the Fed this year, which is one reason the dollar has not experienced a more pronounced decline.
Furthermore, the dollar continues to receive some support from safe-haven demand.
Amid fluctuating global risk sentiment, capital allocation still favors highly liquid US dollar assets, keeping the Dollar Index in a pattern of high-level consolidation rather than entering a one-way downtrend.
Moving forward, investors will focus on the latest US macroeconomic data and speeches from Federal Reserve officials, seeking more signals about the future path of monetary policy.
Concurrently, developments in the Middle East will continue to influence global market risk appetite and have a significant impact on the dollar's trajectory.
From a daily chart perspective, the Dollar Index has temporarily stabilized near 100.50 after consecutive declines and is currently trading below its major moving averages, indicating a generally weak trend.
The MACD indicator remains below the zero line, with bearish momentum holding the advantage, though the downward momentum has slowed somewhat.
The area near 100.20 currently forms the first support zone; a break below this level could see the index test support near 99.80.
On the upside, resistance near 101.00 and 101.60 will be watched; only a sustained move back above 101.60 would signal a potential improvement in the short-term weak pattern.
From a 4-hour chart perspective, the Dollar Index is consolidating at low levels, with short-term moving averages gradually flattening.
The RSI indicator is moving in a neutral zone, reflecting a cautious market mood.
If subsequent US economic data continues to show weakness, the Dollar Index could break below 100.20 and test support near 99.80.
If geopolitical risks continue to escalate and boost safe-haven demand, the index could challenge the resistance zone between 101.00 and 101.30.
Recent pressure on the Dollar Index primarily stems from persistently cooling US inflation and reduced market expectations for near-term Fed rate hikes, which have diminished the dollar's interest rate advantage.
However, escalating tensions in the Middle East, which are pushing up energy prices and global safe-haven demand, have limited the room for further dollar weakness.
In the short term, the dollar's direction will continue to be influenced by a combination of economic data, inflation developments, and Fed policy expectations.
If US inflation continues to decline in the future, the dollar may face further adjustment pressure.
However, if energy prices continue to rise, reigniting inflation expectations, or if global risk sentiment deteriorates further, the dollar could still receive support from safe-haven flows, maintaining its high-level consolidation pattern.
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