The DXY has recovered significantly after retreating toward the 100 level and is currently holding around 100.8–100.9.
This move suggests that the market is beginning to look beyond the softer inflation figures recorded in June and is reassessing the risks that could influence U.S. monetary policy in the months ahead.
Previously, the U.S. dollar came under pressure after inflation data fell below expectations. Headline CPI declined by 0.4% month on month in June, while core CPI was unchanged.
On an annual basis, core inflation eased to 2.6%. Producer prices also fell by 0.3%, marking their sharpest decline in 14 months. These figures weakened expectations that the Federal Reserve would need to raise interest rates further and briefly pushed the DXY down toward 100.3.
However, markets do not respond solely to inflation that has already occurred. They also price in expectations for future inflation. That risk is now re-emerging through higher energy prices. Rising tensions between the United States and Iran, together with concerns over possible disruptions to shipping through the Strait of Hormuz, have pushed Brent crude close to USD 91 per barrel and WTI toward USD 86 per barrel, both near five-week highs. Any prolonged disruption could create consequences far greater than those associated with a typical fluctuation in oil prices.
In my view, this represents the most important shift in the current DXY narrative. The latest CPI data showed that past price pressures have eased, but the renewed rise in oil prices is increasing the risk of another inflationary cycle through higher fuel, transportation, and production costs. In other words, the market is not yet concluding that inflation has definitively returned, but it is being forced to increase its protection against that possibility. This makes the prospect of an early shift toward a more accommodative Fed policy less convincing.
The reaction in the bond market supports this argument. The yield on the 10-year U.S. Treasury has climbed to around 4.63%, its highest level in two months, reflecting expectations that interest rates may need to remain elevated for longer. As U.S. yields rise while the policy outlook in many other major economies remains less hawkish, the dollar’s interest-rate advantage improves and provides additional support for the DXY.
The U.S. dollar is also benefiting from its traditional safe-haven role. Geopolitical tensions typically support the dollar by increasing demand for defensive assets. In the current environment, however, the effect is stronger because the conflict is not only increasing risk aversion but also driving oil prices higher. This is simultaneously supporting inflation expectations, Treasury yields, and the U.S. dollar. The combination is relatively favorable for the DXY, although it is less supportive of the global growth outlook.
I believe the current rebound in the DXY has a stronger foundation than a purely technical recovery. Nevertheless, the index has not yet entered a fully convincing uptrend. It would need to break and remain above the recent high near 101.5 to confirm the beginning of a new upward phase. If oil prices remain elevated, U.S. yields continue to rise, and the Fed maintains a cautious stance toward inflation risks, the dollar could extend its recovery. Conversely, a diplomatic agreement that eases tensions in the Middle East and triggers a sharp decline in oil prices could remove part of the support currently underpinning the DXY.
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