The Dollar Index (DXY) traded slightly higher during the Asian session on Friday, reclaiming the psychologically significant 100.00 level and temporarily ending a three-day losing streak. After dipping to its lowest point since June 17, the index remains on a clear weekly downtrend, with significant market divergence on the dollar's future direction. The dollar's recent weakness was primarily driven by cooling US inflation data. The US Personal Consumption Expenditures (PCE) price index for June fell 0.1% month-on-month, the first monthly decline since April 2020. Data shows that falling energy prices and temporary oil price declines have eased overall inflation, prompting the market to lower expectations for further near-term policy tightening by the Federal Reserve. Following the inflation data release, the dollar index weakened rapidly as investors reassessed the Fed's future policy path.
However, core PCE inflation remains significantly above the Fed's 2% target, suggesting policymakers may still maintain a cautious stance. The market currently still expects at least one rate hike from the Fed by the end of this year. Particularly, with crude oil prices remaining volatile due to supply risks, energy costs could reignite inflationary pressures, making it difficult for the Fed to pivot quickly to an accommodative policy. Developments in the Middle East are also a key factor influencing the dollar's trajectory. Iran recently rejected a proposal for joint management of the Strait of Hormuz, which involved Iranian participation in waterway management and related fees. Meanwhile, the US announced the completion of a new round of military operations targeting Iranian objectives, fueling renewed concerns about a diplomatic resolution. Additionally, shipping risks in the Red Sea and surrounding areas are escalating. Saudi Arabia is pushing for the establishment of an international cooperation mechanism to protect key shipping lanes in the Bab el-Mandeb Strait, the Red Sea, and the Gulf of Aden. Previously, actions by the Yemeni Houthi group have increased commercial shipping risks and heightened market concerns about a broader regional conflict.
Increased energy supply risks directly impact the dollar and global inflation expectations. On one hand, rising crude oil prices could strengthen safe-haven demand, providing support for the dollar. On the other hand, high energy prices could prolong major central banks' tightening cycles, putting pressure on risk assets. The dollar market is currently in a phase of conflicting factors. Slowing US economic growth and falling inflation weaken the dollar's upward momentum, while geopolitical risks, energy price volatility, and the expectation of another Fed rate hike provide a floor for the dollar. Investors will focus on US economic data, Fed officials' speeches, oil market trends, and changes in the Middle East situation. If inflation continues to fall, the dollar may extend its correction; but if energy prices rise again, fueling inflation expectations, the dollar could still find rebound momentum. From a daily chart perspective, the dollar index has seen a technical bounce after a consecutive decline, now back above the 100.00 level, but the overall trend remains weak. This rebound from recent highs is more of a corrective move, and the market needs to watch the resistance zone. Initial resistance is around 100.50, followed by the 101.20 and 101.80 areas. A break above 101.80 could alleviate recent downward pressure. Support lies near 99.50, followed by 99.00 and 98.50. The technical structure shows the dollar is still in a correction phase; if it fails to break above key resistance, it risks a further decline.
On the 4-hour timeframe, the DXY has formed a short-term rebound, with the price back above the 100 mark, easing short-term selling pressure. Technical indicators show a recovery in short-term momentum, but the strength of the rally needs further confirmation. If the dollar can stabilise above the 100.50 area, it could push towards 101.20. If the rebound fails and the price breaks below the 99.50 support, it could retest recent lows. The current 4-hour trend is mainly influenced by Fed policy expectations and risk aversion, with the market awaiting new fundamental catalysts.
The dollar index is currently in a tug-of-war between cooling inflation expectations and geopolitical risk support. The improved US PCE data has reduced expectations for a rapid rate hike, pressuring the dollar in the short term, but the risk of rising crude oil prices and the possibility of the Fed maintaining a tight policy provide support. In the near term, whether the dollar's rebound can continue will depend on US economic data and energy market changes. If inflation continues to decline and Fed policy expectations turn dovish, the dollar could face further pressure. However, if Middle East risks push oil prices higher, reigniting inflation concerns, the dollar could regain safe-haven capital inflows. Overall, the dollar index remains in a correction phase, with the 100 level becoming a key battleground for bulls and bears. Investors need to closely monitor Fed policy signals, US inflation trends, and global risk events to determine the next direction for the dollar.
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