The US Dollar Index (DXY), which gauges the value of the US dollar (USD) against six key currencies, is on an upward trend after two days of steadiness, trading at approximately 100.90 during European hours on Tuesday. The dollar found support due to increased demand for safe-haven assets amidst rising geopolitical tensions.
Concerns escalated in the Strait of Hormuz late Monday when Iran allegedly launched at least two missiles at commercial vessels navigating through that critical waterway. While two ships suffered considerable damage, thankfully, there were no reported injuries. In another incident, the UK Maritime Trade Operations (UKMTO) confirmed that a tanker moving south was struck on its port side by an unidentified projectile, resulting in a fire on board.
That said, the dollar’s upward movement might face some limitations, as traders are anticipating Federal Reserve interest rate hikes both this month and in September. This shift in outlook came after a disappointing jobs report indicated that job additions in April, May, and June fell short of Wall Street predictions.
In addition, there was a slight dip in business activity within the US service sector. The June ISM Services Purchasing Managers Index (PMI) decreased from an expected 54.5 to 54.0, aligning with consensus expectations while still indicating expansion. Delving into the report further, the price index dropped from 71.3 to 67.7, whereas the employment index saw a noteworthy increase, moving out of contraction territory from 47.9 to 51.2.
Furthermore, hawkish remarks from Federal Reserve Governor Christopher Waller, paired with robust domestic economic data, could bolster the dollar’s standing.
Waller emphasizes Fed’s dedication to inflation while noting guidance limitations
Waller’s recent remarks carried slightly more weight than usual, highlighting the nuanced role of forward guidance with an FXS Speech Tracker score of 7.1/10, above the benchmark of 6.4/10. He noted that while forward guidance can expedite policy effectiveness, it can also become a barrier if it’s too rigid or applied in contexts with high uncertainty. This suggests he leans toward being flexible and data-driven rather than making firm commitments. Subsequent comments reinforced the reliability of the 2% inflation target, dismissed the idea of using low interest rates to tackle the US budget deficit, and pointed to evolving risks as policy approaches shift due to inflation adjustments and labor market stabilization, all of which appear moderately hawkish for the dollar.
The FXS Fed Sentiment Index increased by 1.83 points, reaching 125.72, indicating a distinctly hawkish stance well above the neutral mark of 100. The robust FXS Speech Tracker score combined with index levels firmly in hawkish territory suggests that the markets will continue to factor in Fed caution, supporting the dollar against the euro and yen.
